The following points highlight the top four cooperative credit institutions. The credit institutions are: 1. Central Cooperative Banks 2. Apex or State Co-Operative Banks 3. Reserve Bank of India and the State Co-Operative Banks 4. Land Development Banks.
Credit Institution # 1. Central Cooperative Banks:
The Central Banks work as an intermediary to link the primary societies with the money market. They serve as the ‘balancing centre’ for adjusting the surplus and deficiency of working capital of the primary societies.
According to Dr. Laud, “The raison d’ etre for the establishment of district central cooperative banks is that there should be an intermediary agency between the primary credit society with rural bias run by agriculturists having no touch with the money market and the provincial cooperative bank run mainly by city men with urban bias having no close association with the country side.”
The Central Cooperative Banks occupy and form an important position in the cooperative credit structure. They form an important link between the State Cooperative Banks and the primary agricultural credit societies. The success of the cooperative credit movement largely depends on their financial strength.
The main functions of the Central Cooperative Banks are:
(1) To meet the credit requirements of primary member societies, for production, marketing and supply operations by arranging a regular flow of credit to them.
(2) To undertake ordinary commercial banking business, (such as the accepting of deposits from the public collecting bills, cheques, hundies, railway receipt, safe custody of valuables, purchase and sale of securities and advancing loans to individual members against fixed deposit receipts, government paper, gold, silver and agricultural produce) in rural areas.
(3) To act as balancing centres for the primary societies, by making them available the surplus funds of some societies to those which face shortage of funds and thus equalise the flow of the capital. Their own resources are intended to serve as a cushion to absorb the impact of the defaults and arrears arising at the primary level.
(4) To undertake non-credit activities, such as the supply of seeds, manures, foodstuffs and consumer goods.
(5) To maintain close and continuous contact with the primary societies and provide leadership to them.
(8) To supervise and inspect the primary societies, and ensure a satisfactory implementation of the recognised credit societies.
(7) To provide a safe place for the investment of the resources of primary societies.
The area of operation varies from the taluka to district and tehsil in some States to a district, or several talukas or tehsils in other States. Although the Maclagan Committee (1915) recommended that, a central bank should cover as large an area as compatible with convenience and efficiency, the present policy is that there should be only one central bank for each revenue district so that it could be strong enough as an ‘economic unit,’ i.e., its owned funds should not be less than Rs. 3 crores and its working capital should be of the order of Rs. 20 to 25 lakhs.
As a result of reorganisation of the weaker units, the number of Central Cooperative Banks has come down from 505 in 1950-51 to 478 in 1955-56, to 380 in 1960-61, to 346 in 1965-66, to 341 in 1968-69. In 1976-77, the number stood at 343.
The membership is confined both to individuals and the societies. Membership is open not only to rural cooperative credit societies but also to marketing societies, consumers’ stores, farming societies and urban cooperative credit societies. Individuals are no longer accepted as members on grounds of safety. Hence, the individual membership fell from 1.44 lakhs in 1955-56 to 1.09 lakhs in 1968-69; while the membership of primary societies increased from 1.56 lakhs in 1955-56 to 2.45 lakhs in 1968-69.
Central Cooperative Banks raise funds by way of share capital deposits from public; borrowings from the State Cooperative Banks, grants from the government and loans. The share capital of the central cooperative banks has shown a considerable rise from Rs. 4 crores in 1950-51 to Rs 38 crores in 1960-61. It stood at Rs. 76 crores in 1965-66, at Rs. 115 crores in 1968-69, at Rs. 211 crores in 1974-75 and at Rs. 248 crores in 1976-77.
The average share capital per bank moved from Rs. 0.80 lakh in 1950-51 to Rs. 9.98 lakhs in 1960-61, to Rs. 33.79 lakhs in 1968- 69, and to Rs. 72.50 lakhs in 1976-77. The amount contributed by the States in the share capital of the Central Cooperative Banks increased from Rs. 10 crores in 1960-61 to Rs. 29.88 crores in 1968-69 and to Rs. 72.12 crores in 1976-77. The deposits of Central Cooperative Banks increased from Rs. 38 crores in 1950-51 to Rs. 111 crores in 1960-61, to Rs. 351 crores in 1968-69 and to Rs. 1092 crores in 1976-77.
The average deposits per bank moved from Rs. 7.48 lakhs in 1950-51 to Rs. 29.10 lakhs in 1960-61, to Rs. 102 lakhs in 1968-69 and to Rs. 313 lakhs in 1976-77. The highest average deposit was in Maharashtra and Gujarat. The weakness of these banks in Assam, Bihar, Rajasthan, West Bengal, was reflected in the very level of deposits of central banks in these states.
The importance of deposits has been expressed by the All-India Rural Credit Review Committee in these words. “They help the banks immediately by enabling them to cushion their overdues and thereby maintain an uninterrupted flow of credit from the higher financing agencies. The expanding area and scale of cooperative activity and growing diversification have also made it necessary that cooperative banks should build up larger resources by way of deposits.”
The deposits may be had in the current account, in the savings account and fixed deposit account. These banks may also accept recurring deposits, day deposits, and provident fund deposits.
The borrowing capacity of the Central Cooperative Banks is generally related to their own funds. In practice, a ratio of 1 : 10 between owned funds and deposits is generally considered as the norm. The borrowing power of these banks is generally fixed at 12 to 15 times of their paid-up share capital and reserve fund.
These borrowings are from outside agencies viz., the State Cooperative Banks, Government, R.B.I., State Bank of India and, other central banks and joint stock banks. These banks usually get funds at 2 1/2 to 4 per cent rate from the State Cooperative banks, while the lending rate is from 4 to 6 per cent; thus the margin of 2 per cent is their income which is used in meeting overhead and administration costs.
Loaning Policy:
Loans are generally advanced to primary credit societies for financing agriculture such as cultivation expenses, purchase of seeds, manure and other requirements for seasonal agricultural operations for a short- term (for 12 months); land reclamation, building of cattle sheds, digging and repairing of wells, purchase of cattle and carts for medium term (from 1 to 3 years); for purchase and installation of pumps and oil engines for a medium term (not exceeding 5 years) and for refund of deposits (for not exceeding one year).
Loans are granted on proper security, landed assets, house mortgage, cattle, agricultural- produce, gold or ornaments, fixed deposit receipts, life insurance policies- government promissory notes, and pronotes executed by the borrowing societies. At the society level, the loans are secured by personal security for solvent members and mortgage of lands.
The amount of loans advanced increased from Rs. 83 crores in 1950-51 to Rs. 351 crores in 1960-61, to Rs. 1021 crores in 1968-69 and to Rs. 1808 crores in 1976-77. The amount of loan advanced per bank moved from Rs. 16 lakhs in 1950-51 to Rs. 92 lakhs in 1960-61, to Rs. 329 lakhs in 1968-69 and to Rs. 527 lakhs in 1976-77.
The most disquieting trends in the working of these banks is the rise in percentage of overdues, which increased from 8.7 in 1950-51 to 12.5 in 1960-61, to 22 in 1968-69 to 32.30 in 1973-74 and to 33.52 in 1976-77. This high proportion of overdue has been due to poor quality of supervision, lack of prompt action against wilful defaulters and a general slackness in the efforts to recover loans.
The rate of interest on loans and advances charged by these banks range from 5 1/2 to 6 1/4 per cent. The margin retained by these banks on the advances in respect of funds obtained by borrowing from the Apex bank varies between 1 to 3 per cent.
Management and Supervision:
The management of the Central Cooperative Banks generally vests in the Board of Directors, containing of 12 to 15 members. These banks supervise the primary societies. At least one supervisor looks after 20 societies and one senior supervisor every 80 supervisors.
Growth and Development of the Banks:
The first, central bank was opened in U. P., in 1906 as a primary society. It was followed by such banks in M. P. and Rajasthan in 1910. Upto 1918, many such banks were opened in other parts of the country. Between 1919-1929, Central Banks did increase from 233 in 1919-20 to 588 in 1929-30, and their membership increased from 1.22 lakhs to 1.9 lakh and working capital from Rs. 6.43 crores to Rs. 30.90 crores during this period.
During Economic Depression of the Thirties the working of the banks was hard hit so that the membership declined to 0.91 lakh in 1936-37; though the number of banks increased to 611. During war years, these banks made some progress. Their membership increased to 1.98 lakhs, working capital to Rs. 45 crores and deposits to Rs. 33 crores in 1945-46. Inspite of this progress, the cooperative banks suffered from heavy overdues, small financial resources and too much dependence upon State banks and weak internal organisation.
All these needed considerable reorganisation. Therefore, during the First Plan, the States began to follow the progress of reorganisation and amalgamation of weaker units. This progress was vigorously followed even during the Second Plan. The principle of “one Central Bank for each unit” was followed in all States as per the recommendations of the Rural Credit Survey Committee Report.
As a result of this reorganisation policy the number of central banks fell from 503 in 1950-51 to 380 in 1960-61. In some States like Bihar, Punjab, Rajasthan, and West Bengal, this programme of reorganisation was also followed during the Third Plan period. So that the number of central cooperative banks further fell from 380 in 1960-61 to 346 in 1965-66, to 341 in 1973-74 and it was 342 in 1976-77. There has been very slow increase in the number of central cooperative banks. Total number of central cooperative banks was 350 in 1992-93.
The share capital of Central Cooperative Banks was Rs. 2484 crores on March 31, 1999. The reserve money of Central Cooperative Banks was Rs. 4801 crores and the loan advances was Rs. 12796 crores on March 31, 1999. The deposits in Central Cooperative Banks has also increased. The deposits in Central Cooperative Banks was Rs. 45609 on March 31, 1999.
The Table given below shows the progress of Central Cooperative Banks:
The present policy is to have one central bank for each district. In some States like Andhra Pradesh, Assam, Bihar, West Bengal, Punjab, Orissa, Haryana and Tamil Nadu, more than one bank still continue to exist in the same district. The share-capital of the banks was Rs. 193 crores in 1973 -74 and 249 crores in 1976-77.
The State government provides about 28 per cent of the total share capital of these banks (i.e. Rs. 54.13 crores and Rs. 72.12 crores respectively). The deposits of these banks stood at Rs. 718 crores in 1973-74 and Rs. 1073 crores in 1976-77. The average deposit per bank was Rs. 21 lakhs and 313 lakh. The average deposit collected by these banks was highest in Maharashtra and lowest in Assam. To attract more deposits a large number of new branches were opened in the rural areas.
However, the position of these banks in regard to overdues was not satisfactory. These formed 31 per cent of the outstandings. West Bengal and Assam had more than 60 per cent of outstandings, while in Andhra Pradesh, U. P., Bihar, Orissa, Punjab and Haryana it ranged from 40 to 60 per cent. The chief reasons for such a high percentage of overdues were- famine and scarcity conditions which made it difficult to recover loans in time; defective loaning policies and faulty procedures; slackness in supervision and managerial deficiencies at the bank’s and the primary societies’ level.
The achievements of central banks have been well summed up by the Madras Committee on Co-operation thus; “The central bank has served their purpose of financing rural and urban societies and balancing their funds admirably well; they mobilised local deposits and made them available to primary societies at reasonable rates of interest and have rendered great service in the organisation of agricultural finance on co-operative lines. They have drawn into the movement a number of honorary men whose services have been invaluable to the progress of the co-operative movement; they have taken a genuine interest in the growth of the movement in their respective areas and in schemes of co-operative education and rural development generally. They have enlisted the sympathy of an increasing body of depositors, and as a rule, have justified the confidence which the depositors have reposed in them.”
But they cannot be wholly absolved from blame for the present bad plight of the village societies. The banks found themselves with a plethora of funds and initiated a policy of hasty expansion of primary societies to provide a profitable outlet for their surplus funds.
Over-financing without regard to the repaying capacity of the borrowers, lack of effective supervision, undue tenderness in effecting recoveries even in good seasons, absence of common policy in the regulation of borrowing and lending rates and faulty organisation of the primary units have all added to multiply overdues and bad debts and get the asset frozen.
Weaknesses of the Central Cooperative Banks:
The central cooperative banks suffer from certain weaknesses.
Some of these are:
1. Uneven Expansion of credit:
These banks have not provided credit in all states on a uniform basis. This has been due to weak primary structure including inadequate coverage of villages and rural population and presence of a large number of dormant societies.
2. Defective Loan Operations:
The loan operations of the banks have been defective for many reasons, such as:
(i) Large advances granted to individual members at the cost of primary credit societies;
(ii) High operation of bad and doubtful debts;
(iii) Ill-equipped staff to undertake the duties of the bank and
(iv) Undertaking trading activities by many banks.
3. Difficulty in Mobilising of Deposits:
Central banks have not succeeded in mobilising savings because of the severe competition from the commercial banks.
4. Heavy Overdues:
These banks suffer from heavy overdues (about 31% of the loan outstandings). The situation is worst in States like Assam, Madhya Pradesh, Orissa and Rajasthan. This situation is due to poor recoveries, inefficient management, inadequate and untrained staff, lack of supervision, defective loan policies and book-adjustments etc.
The central cooperative banks are not competent to handle such business as the purchase and sale of bills, notes, cheques or hundies their discount since it is risky and moreover, this business is not in keeping with the object of cooperative banking. Hence, these banks are generally not permitted to engage into such business.
(i) They have failed to establish a close and intimate association with the primary credit societies.
(ii) They do not provide adequate loans to industrial consumer and other non-credit societies.
(iii) They have failed to work as a friend and guide to the societies for they have not been able to offer them guidance in the matter of sound operational policies.
(iv) Quantitatively their position has been highly unsatisfactory because in many states ‘A’ type banks do not exist at all, while in others ‘C’ type predominates.
(v) There is no adequate provision for effective supervision and utilisation of the loans advanced. Further, loans are not given in instalments and no efforts have been made to link credit with marketing.
(vi) Sometimes, huge amounts have been kept with commercial banks by way of call deposits in addition to current accounts. This system is in utter disregard of the cooperative principles and needs to be discouraged.
(vii) Filing of complaints for award against wilful defaulters and prompt action for the execution of awards obtained have been often found wanting in many cases.
(viii) Book adjustments are made in order to inflate the percentage of recoveries.
(ix) Margins are not properly regulated in case of fluctuation of prices of the pledged produce.
(x) Sometimes, the stocks pledged with these banks are not properly stored and insured.
The All-India Credit Survey Committee has observed, In general the staff employed by the central cooperative banks was ill-equipped for the nature of duties they had to perform. Planning of favourites in cooperative societies was rampant. The maintenance of registers and books leave much to be desired. These are not kept upto-date and are not properly checked by higher officers.
In many cases statements sent to the R. B. I. and to the Registrar are misleading and sometimes incorrect. The staff employed by these banks for supervision of the primary societies is inadequate. Three tier programmes are not thoroughly scrutinised. Consequently, societies situated in remote areas remain unvisited for months together.
The acid test of the success of the central banks lies not in the growth of banking services they provide in the mofussil areas, but mainly in the extent to which the primaries they finance, are taught to become efficient and thrift organisation. On the basis of these tests it appears that in most states the central banks have not proved a success.
Re-Organisation Scheme:
As of the end of the June 1976, 181 C. C. B. were adjudged to be weak requiring special measures for rehabilitation. Regarding plan of the rehabilitation programmes, the R.B.I. has issued guidelines on investigation of overdues, steps for recovery, rationalisation of loaning policies and procedures, mobilization of deposits and time bound programme of development in selected areas.
As Agricultural Credit Intensive Development Scheme has been formulated with a view to concentrating efforts, on a selective basis, to strengthen the cooperative structure and like the credit programmes with production programmes. Under the first phase of the scheme, 41 districts (including SMFD Agency and DPAP Districts) in 16 States have been selected for intensive credit development in various sectors of the rural economy.
Some of the important criteria followed in selecting 4 districts were:
(a) The districts which have scope for development and a reasonably strong cooperative structure,
(b) The central cooperative bank of the district should not have heavy overdues i.e. (ordinarily these should be less than 40 per cent),
(c) Existence of SMDA and DPAP scheme, and
(d) In the few districts, some parts of the districts were covered by the Regional Rural Banks.
In particular the C. C. B., in these districts will have the main objective, viz.:
(i) To improve their organisational and operational effectiveness,
(ii) To create an awareness for growth and need for diversification,
(iii) To build up own resources and manpower so as to ensure gradual independence from outside help,
(iv) To progressively professionalise their managements, and
(v) To bring about orientation of policies toward benefiting the common interest of the rural population specially the weaker one.
Credit Institution # 2. Apex or State Co-Operative Banks:
The State Co-operative Bank is a central institution at the State level which works as a final link in the chain between the small and widely scattered primary societies, on the one hand, and the money market, on the other.
It balances the seasonal excess and deficiency of funds and equates the demand for and supply of capital. It takes off the idle money in the slack season and supplies the affiliated societies and Central Co-operative Banks with fluid resources during the busy season. It is the vertex of the pyramidal structure in a state for the provision of short and medium term credit to agriculturists on co-operative basis.
The chief objectives of the Apex Bank is to co-ordinate the work of the Central Banks, and to link co-operative credit societies with the general money market and the Reserve Bank of India. These banks work as real pivots of the co-operative movement in the State. They act as potential source of credit for seasonal and emergent needs of their members.
Their main functions are:
(1) They act as bankers’ bank to the Central Cooperative Banks in the districts. These banks not only mobilise the financial resources needed by the societies but they also deploy them properly among the various sectors of the movement.
(2) They co-ordinate their own policies with those of the co-operative movement and the government.
(3) They form a connecting link between the co-operative credit societies and the commercial money market and the R.B.I.
(4) They formulate and execute uniform credit policy for the co operative movement as a whole.
(5) They promote the cause of co-operation in general by granting subsidies to the Central Co-operative Banks for the development of co-operative activities.
(6) They act as a clearing house for capital i.e., money flows from the Apex Banks to the Central Banks and from the Central Banks to the rural societies and from them to individual borrowers.
(7) They supervise, control and guide the activities of the Central Bank through regular inspections by their inspection staff and rectify the defects in their work. Thus, they act as their friend, philosopher and guide.
(8) They also perform general utility functions such as issuing drafts, cheques and letters of credit on various centres and thereby help remittance of funds.
(9) They collect and discount bills with the permission of the Registrar.
(10) In certain places they also provide safe deposit lockers and facilities for safe custody of valuables.
(11) They help the state Governments in drawing, up co-operative development and other development plans and in their implementation.
The Reserve Bank of India has mentioned the following functions of the State co-operative banks – “The State co-operative bank is the apex bank of the movement in a state. It acts as the clearing and balancing centre for the Central Banks by transferring surplus funds of one locality to another serving as a channel of the remittance of funds. It also attracts funds for the movements at lower rates and from a wider area than is possible for the Central banks and invest the surplus funds of the Central banks into the commercial markets, when necessary with greater facility than they would manage to do themselves. The State Bank may also co-ordinate the working of co-operative central and urban banks in the State in such matters as the borrowing and lending rates, the rates for collection of various documents, besides advising the banks generally in regard to the efficient conduct of their business.”
In the words of Wolff, “The underlying idea of this financial distributary system is that the resources of the society are available to thousands of small cultivators who need accommodation thinning out of stream of water collected, sending it in rills over a broad surface so that irrigation may be perfect and reaching every root to be watered.”
These banks are playing a major role in guiding the Central Cooperative Banks, supervising their work and raising resources for the co-operative banking system.
Generally, there is only one Apex Bank in each State but some States even have more than one as in Maharashtra, M. P., Punjab and Andhra Pradesh. In 1976-77, there were 26 State Co-operative Banks in the country as against 15 banks in 1950-51. These banks had 125 branches.
Membership of these banks is open to all Central Co-operative Banks, and such other societies as may have direct dealings with them. In some states, e.g., Tamil Nadu, Maharashtra, and Bihar individuals are also allowed to become members. However, individual membership is now fast declining (from 11,743 in 1955-56 to 8,500 in 1972-73). State Governments have now become share-holders of these banks in order to give them the necessary strength, influence and borrowing power.
The main authority of these Banks rests in the general Body. Power of day-to-day working are given to the Board of Directors. The Government, in its capacity as a share-holder, nominates some directors (3 to 4).
The General Body meets once in a year when it transacts these business- (i) receives and approves a report of the year’s work; (ii) decides how surplus is to be utilized; and (iii) elects the Board of Directors.
The primary sources of the working capital of these banks are the share capital reserve fund, deposit from members and non-members; borrowings from Reserve Bank of India, State Bank of India, State Governments and others; and the direct State contributions. The share capital of these banks increased from Rs. 18-24 crores in 1960-61 to Rs. 37.69 crores in 1968-69 to Rs. 54.25 crores in 1973-74 and to Rs. 90-79 crores in 1976-77.
This increase was largely due to liberal government contribution towards the share capital of these banks. (It increased from Rs. 6.46 crores to Rs. 11.60 crores to Rs. 19.34 crores and to Rs. 23.75 crores respectively during these years.
Deposits are obtained from members as well as non-members, individuals and companies and also from local boards, municipalities and educational institutions, in the form of current savings, fixed and call deposits. They also include reserve fund deposits of affiliated central banks and societies, provident fund deposits of employees and security deposits.
The Central Banks keep their surplus funds as a part of their working capital with these banks. The total deposits of these banks increased from Rs. 72.33 crores in 1960-61 to Rs. 215.63 crores in 1968-69 to Rs. 473.34 crores in 1973-74 and to Rs. 805.28 crores in 1976-77.
Borrowings are in the form of deposits from the public in the shape of current saving and fixed deposits, and direct borrowings in the form of loans and advances against agricultural bills on government guarantee from the Reserve Bank of India, the State Bank of India, and the State Governments. The ceiling on borrowing varies from 12 times the owned funds to 20 times. The borrowings from the R. B. I. are the largest. The rate of interest charged by it on short-term borrowing is 2 per cent below the bank rate and medium-term loans at 1 1/2 per cent below the Bank rate.
The R. B. I. provides loans to these banks for short-term and medium-term purpose. The State Bank of India provides loans for marketing and processing societies, consumer co-operatives and for financing procurement of food grains. Overdraft facilities are also granted against government securities, by the State Bank of India for financing their affiliated societies.
From the year 1972-73, the R.B.I. has started sanctioning a separate credit limit for marketing of crops to these banks. During 1972-73, the total credit limits sanctioned amounted to Rs. 52.83 crores for marketing of cotton and other crops as against Rs. 40.58 crores in 1973-74. This limit sanctioned to the State Co-operative Banks was of the order of Rs. 696 crores in 1976-77.
The Apex Banks maintain various types of reserve fund viz., the statutory reserve fund, bad debt reserve fund, and agricultural credit stabilisation fund, etc. The reserve funds of all kinds increased from Rs. 2.66 crores in 1960-61 to Rs. 57.17 crores in 1971-72.
Loaning Policy:
According to the All India Rural Credit Survey Committee, “the demands for agricultural credit should be given top priority; and loans to individuals should be gradually restricted.” Financing may be done primarily for agricultural purposes in the form of loans, cash credit and/or over-drafts. A borrowing Central Co-operative Bank is required to deposit old shares in the Sate Co-operative Bank to the extent of 1/20 of its borrowings.
The Apex Banks provide short-term loans (for a period of 12 months) not only for financing agricultural operations but also for marketing of crops and distribution of controlled commodities. Medium-term loans are granted for purchase of cattle and machinery, reclamation of land, sinking and renovation of irrigation walls, tanks and channels- bunding, enclosures and fencing, construction of farm-sheds, godowns; laying down gardens and orchards; replacement, repairs and renewals of machinery and equipment.
Loans are granted to the member societies mostly through their branches. The amount of all types of loans increased from Rs. 258.20 crores in 1960-61 to Rs. 798.52 crores in 1968-69; to Rs. 1161.91 crores in 1973-74 and to Rs. 1717.08 crores in 1976-77.
The rate of interest charged shows a wide variation from State to State, the average lending rate for short-term advances ranges from 4 1/2 per cent to 8 per cent and that for medium-term slightly higher.
Cash credit may be sanctioned on the pledge of agricultural produce/finished or semi-finished goods and stores and supplies; government promissory notes, central land mortgage banks, debentures, Treasury certificates, National Savings certificates, National Savings Bonds, to the extent of 90 per cent of the market value; and society bonds and cash credit arrangements endorsed by a Central Bank.
Loans may be given for 6 months against fixed deposit receipts to any holder at the rate of 90 per cent and at a rate of interest 1 1/2 per cent higher than the rates allowed on such deposits.
Credit Institution # 3. Reserve Bank of India and the State Co-Operative Banks:
Since 1950, the R.B.I. is playing an important role in the field of agricultural credit. According to the Agricultural Credit Board (of the R.B.I.) the new scheme came into operation from 1st July, 1973.
The salient features of which are:
(a) The R.B.I. grants financial assistance to the State Banks on behalf of the Central Banks for seasonal agricultural operations at 1/2 per cent below the Bank rate;
(b) The highest level of borrowings from the R.B.I., during any of the 3 years (ending June, 1973) is deemed as ‘Base level’ borrowings and a rebate of 1 1/2 per cent in interest is allowed on borrowing upto this extent.
(c) Special concessional rebate of 1 1/2 per cent upto 4 times the Central Bank’s involvement is given in cases of low level of borrowings.
(d) Weak and non-viable central banks are exempted from this scheme.
The R.B.I., also sanctions medium-term loans for periods ranging from 15 months to 5 years. These are given out of the National Agricultural Credit (Stabilization) Fund to the State Bank to enable them to convert short-term loans into medium-term loans. Such sanctions totalled Rs. 22.47 crores to State Co-operative Banks during 1973-74 and Rs. 30.50 crores in 1976-77.
The Central Government also provides assistance to the State Cooperative Banks through State Governments, for building up their Agricultural Credit Stabilisation Funds. Total assistance till 1976-77 amounted to about Rs. 30.50 crores.
Evaluation of the Working of the State Co-Operative Banks:
These banks have made fairly good progress. Their numbers, membership and working capital has increased since 1950-51, when there were only 15 such banks. They have been meeting the demands of the Central Co-operative Banks. Some of the Banks have successfully introduced and operated mutual arrangement schemes to facilitate drawing of drafts and collection of bills among the Central Co-operative Banks. However, “Barring two or three States relatively are well-developed in this respect. State Cooperative Banks have yet to become effective units of a co- ordinated structure of co-operative credit.”
There has been continuous progress in the working of State Cooperative Banks of the country. There were 28 State Cooperative Banks in the country in 1991-92 with a working capital of Rs. 12307. Loan advanced by the State Cooperative Banks increased from Rs. 55.2 crores in 1951-52 to Rs. 7755 crores in 1991-92. There has been substantial increase in the owned funds of State Cooperative Banks.
Problems and Weaknesses in the Working of State Co-Operative Banks:
The State Co-operative Banks do suffer from the following weaknesses:
(i) Poor Deposits Mobilisation:
These banks have not been successful in raising deposits as, even now, individual deposits form less than 25 per cent in many States.
(ii) Ineffective Supervision and Inspection:
Many of the Banks have not taken up this work in right earnest. Some of the banks have neither adequate nor separate staff for this work. Officers of these Banks sometimes pay only ad-hoc and hurried visits.
(iii) Book Adjustment:
Book adjustments are often made regarding repayment of loans. The State Co-operative Banks have failed to check the fictitious transactions of the Central Co-operative Banks.
(iv) Undesirable Investment of Funds:
Despite the advice of the R.B.I., a cautious policy is not being followed in the matter of investments of the funds which are even now utilised for the purchase of shares in other co-operative institutions; or in making huge advances to the primary co-operative societies; and by way of loans to individuals.
(v) Increasing Overdues:
The overdues of the Banks have been showing a rising trend. This is due to the fact that these banks have not followed the prescribed loaning procedure.
(vi) Failure to Assess Genuineness of Borrowing:
The banks have failed in assessing the genuineness of the borrowings of the Central Co-operative banks. This is evidenced from the fact that the credit limits of such banks had been fixed on the basis of the owned funds without taking into account their past performance; and the banks own financial position.
Credit Institution # 4. Land Development Banks:
Land Development Banks are the institutions which provide long term finance to agriculturists for agricultural credit needs—which may be for seasonal agricultural operations as well as for various long-term needs for development of land and agriculture. These banks, in fact, provide finance for three main purposes, viz., the repayment of the old debts, purchase of land, undertaking land improvement measures and redemption of mortgage on agricultural land. Such loans are comparatively large and may run for 10 to 15 years and even more.
Need for Land Development Banks:
The need for such banks arose because of the following reasons:
(i) Primary credit societies, because of their poor resources, could not give loans to the cultivators for long periods.
(ii) These societies also did not possess expert assistance for valuation, title deed etc., so that assessment of landed property becomes difficult.
(iii) The abolition of zamindari system and the restrictions put on the dealings of money-lenders made it difficult for the cultivators to get long-term loans for their needs.
(iv) Increase in agricultural production and productivity of land required long term finance which were not available from the commercial banks till recently.
As a result of these, the necessity for developing Land Development Banks was felt.
Land Development Banks are organised on cooperative basis.
The structural pattern of these banks fall into one or other of the following categories:
1. Federal types under which the Central Land Development Bank works at the top level and the Primary L.D.B., at the base level. This type of pattern is available in Andhra Pradesh, Assam, Haryana, Kerala, Karnataka, Maharashtra, Punjab, Rajasthan, Tamil Nadu, and West Bengal.
2. Unitary type under which the Central L.D.B. advances loans directly to individuals operating through branches and agencies. This pattern prevails in Bihar, Gujarat, Jammu and Kashmir and U. P.
3. The Central L.D.B. operates through branches as well as primary L.D.B.
Primary L.D.Bs. are generally organised to serve the whole of the district or a group of talukas; while Central L.D. Banks open their branch offices at the regional or district level with a view to centralising their administrative functions. It may be stated that L.D.Bs. have a two-tier structure in most States with Central L.D.Bs. at the state level and Primary L.D.Bs. at the block/tehsil/sub-division/district levels.
The main objectives of Central L. D. Bs. is to provide long-term finance either to the primary land development banks affiliated to them or to finance directly through their branches.
These banks also undertake the following functions:
(1) To grant loans to Primary L.D.Bs. or to individuals through their branches on the mortgage of un-encumbered property to which the borrower member has a clear title.
(2) To float debentures for raising necessary funds for which the State Governments guarantee for the repayment of principal and interest.
(3) To establish branches/sub-offices or new primary L.D.Bs., to facilitate its business.
(4) To acquire immovable properties and construct buildings.
(5) To encourage the spirit and practice of thrift, mutual help and self-help in the members.
(6) To act as a link between the long-term banking and the R.B.I., and the government.
(7) To mobilize rural savings and to stimulate capital formation in the agricultural sector by the issue of debentures.
(8) To protect the farmers from the atrocities of the money-lenders and from the alienation of land to help them in effecting permanent improvements on their lands.
(9) To supervise and inspect and guide the Primary L.D.B’s., and verify utilisation of loans.
(10) To perform all such functions as may be conducive to the funds fulfilment of the above objects.
These banks usually grant funds for:
(i) Redemption of the old debts;
(ii) Improvement, reclamation and development of land;
(iii) Purchase of agricultural machinery and equipments;
(iv) Other productive purposes like sinking and repair of well; and
(v) Redemption of mortgage on agricultural lands.
On the recommendations of the Rural Credit Survey Committee greater emphasis has begun to be given on reorienting their loaning policies and to encourage loans for productive purposes. Hence, the original name “Land Mortgage Banks” was changed to “Land Development Banks”. In fact, the C.L.D. Banks is the axis around which the entire long-term banking structure in the country revolves.
The area of operation is usually neither too large as to become unwieldy nor too small as to be uneconomic or non-viable unit. In states like Maharashtra, Tamil Nadu, and Karnataka the banks work at taluka level. In other states, Primary Land Development Banks serve the whole of the district or a group of talukas.
In states like Karnataka and Tamil Nadu, Central Land Development Banks have opened branches at district levels. Only Gujarat has branches extending upto taluka level or even below. U.P., about half the number of branches of the central L.D.Bs., serve one tehsil each and the remaining longer areas.
The management of the L.D.Bs., vests in a Board of Directors consisting of 7 to 9 members. In some States 2 to 3 directors are nominated by the Government. In the case of Primary L.D.Bs., one Director is nominated by the Central L.D.B. The members of the Board work for 3 years.
The primary land development banks obtain their finances from:
(i) Share capital;
(ii) Loans from central L.D.Bs.;
(iii) Admission and other fees;
(iv) Grants and subsidies from the government and
(v) Borrowings from other agencies.
On the other hand, the Central L.D.Bs. get their funds from:
(i) Share capital;
(ii) Floating of debentures on the security of its assets and of mortgage bonds transferred by primary L.D.Bs, to it;
(iii) Loans from State Bank of India on the guarantee of State Governments,
(iv) Admission and other fees;
(v) Grants and subsidies;
(vi) Deposits and
(vii) Other funds.
Mostly the work of raising funds is left to the Central L. D. B. The Primary L. D. B. neither accepts deposits nor issues debenture.
The primary L.D.Bs. raise their share capital by issuing shares to the members in certain proportion to their borrowing from the bank. In most States, the linking of share capital borrowings at primary levels is 5 per cent of the loan taken. In Maharashtra it is 10 per cent.
The C.L.D.Bs. raise sources mainly through issue of ordinary rural and social development debentures. The ordinary debentures are issued to the general public institutions and individuals. These are treated as trustee securities and are guaranteed by the State Governments.
These are subscribed by the R.B.I., S.B.I., Co-operative Banks, Commercial Banks and the L.I.C. Ordinary debentures were floated to the tune of Rs. 100 crores in 1968-69; Rs. 113 crores in 1969-70 and Rs. 140 crores in 1970-71. In 1973-74, debentures worth Rs. 74.97 crores were floated. During 1975-76, 1976-77 and 1977-78. the ordinary debentures floated were worth Rs. 75.48 crores, Rs. 80.28 crores and Rs. 120 crores respectively.
Rural Debentures are floated to raise funds for sanctioning loans to agriculturists for productive purpose for period of 6 to 7 years against the mortgage of land. Much progress could not be made in this respect.
Special Development Debentures are issued for providing finance to the agriculturists under special agricultural development or land improvement programmes. In 1977-78, special debentures worth Rs. 190 crores were floated as against Rs. 144.89 crores in 1976-77, Rs. 114.35 crores in 1975-76, and Rs. 83.30 crores in 1973-74, Rs. 10.62 crores in 1960-61. The commercial banks, State Bank of India, Life Insurance Corporation of India are the main agencies which invest in these debentures.
The State and Central Governments also subscribe to these debentures. During 1972-73, a sum of Rs. 12.51 crores and during 1973-74, a sum of Rs. 7.38 crores was invested by the Central Government in the debentures and the State Government’s contribution amounted to the matching investment. During 1974-75, Rs. 6.99 crores and in 1975-76, Rs. 5.96 crores were invested by the Government of India.
From 1976- 77, the Central Government also started investing in the special debentures. It invested Rs. 9.80 crores in the debentures of L.D.B. (of which Rs. 3.86 crores were for special debentures). For 1977-78, a provision of Rs. 17.50 crores has been made. Till the end of December, 1977, the Central Government invested Rs. 4.27 crores in ordinary and Rs. 66.5 lakhs in special debentures of L.D.B.
The C.L.D. Bs. provide 70 per cent of their loans for productive purposes. Loans are advanced for periods ranging between 10 to 20 years. In some states, it is 7 years, in others 12 years and yet in others 15 years.
The maximum amount of loan that a member is entitled to get from the C.L.D. Bs. varies from state to state, ranging from Rs. 10,000/- to Rs. 25,000/-. The loans are given on the mortgage of un-encumbered property to which a borrower has a clear title. Lands offered as security may be wet lands (having permanent source of irrigation), garden lands (the land on which perennial or seasonal fruits are grown), well irrigated dry lands (i.e., lands irrigated by pucca wells) and dry lands (i.e. land fed by rains).
The C.L.D. Bs. have the power to recover their loans by:
(i) Distraint and sale of produce and standing crops on hypothecation; and
(ii) Sale of their mortgaged land itself without intervention of the court.
The rate of interest charged differs in different States. The rate of interest charged by the C.L.D. Bs. is 1 per cent higher than the rate repayable on debentures. The P.L.D. Bs. keep a margin of 1 to 1 1/2 per cent and hence, their lending rates are higher than the C.L.D. Bs. As most of the C.L.D. Bs. issue debentures at 5 1/2 per cent to 6 1 /4 per cent the ultimate rate of interest paid by the farmers ranges between 7 per cent to 9 per cent annum.
There has been a steady progress in the loaning business of L.D.Bs., the total loan disbursements raising from Rs. 11.82 crores in 1960-61 to Rs. 215 crores in 1975-76. In 1976-77, the loaning operations reached Rs. 231 crores. The tentative programme of long-term lending for 1977-78, is expected to be Rs. 138 crores under ordinary and Rs. 190 crores under special lending programmes.
The lending programme of the L.D.Bs. is fixed on the basis of their past performance in recovery at the primary/branch level. Recovery of over 75 per cent entitles the primary/branch to be “unrestricted” lending while a recovery of less than 40 per cent reduces the programme to nil. The Debenture Norms Committee in the R. B. I. regulates the application of the norms of recovery on a uniform basis for all lending programmes of the L.D.Bs.
On the basis of deliberations of this Committee, certain relaxations in the application of above criteria have been laid down, some of which are:
(i) After 30th September 1978, only P. L.D.Bs./branches of S. L. D. Bs. which had achieved a minimum cash recovery of 65 per cent shall be eligible for refinance from the A.R.D.C.
(ii) A.P.L.D.B. branch of S.L.D.B., which has restricted eligibility and as out of the permitting lending, disbursed at least 50 per cent of the amount to small farmers would not be permitted to go one slab above the level of lending determined on the basis of the criteria. This is subject to the condition that 75 per cent of the additional amount so permitted should be advanced for financing small farmers.
(iii) A.P.L.D.B. /branch of S.L.D.B., which has shown improvement in recoveries to the extent of at least 5 per cent over the previous year but not exceeding to enable them to be placed in the higher slab, would be entitled to 5 per cent additional lending programme.
(iv) There is also a provision for reviewing the level of recovery performance of the banks/branches as at the end of December 1977.
(v) Other relaxations relate to the disbursement of committed expenditure towards the second and subsequent instalment of loans; the basis for calculation of the eligible lending programme and also that for these branches of S.L.D.B., P.L.D.Bs. operating in areas affected by drought or other natural calamities.
(vi) The L.D.Bs. might segregate overdues of 5 years or more into a separate blocked account and exclude the same from the total overdues while calculating the percentage of overdues to demand subject to the condition that at the end of 5 years the entire amount put in the blocked account will have to be fully recorded or overdue cover provided for the same by the bank.
With the phenomenal increase in the long-term credit support extended by the L.D.Bs. for investment in agriculture, the percentage of overdues had been fluctuating. At the apex level, the percentage of overdues had declined from 45.4 in 1973-74 to 38.00 in 1975-76. At the primary level, it has declined from 31 per cent to 22 per cent during this period.
Growth and Development of Land Development Banks:
Attempts were made in India as far back as 1883 to provide financial facilities when the L.D.B. of India was started on the model of the Credit Foncier de France but the bank could not succeed because of over-investments without the necessary safeguards. A land mortgage bank was registered on 30th June, 1920 at Jhang in Punjab but it has had a chequered history.
The period from 1920 to 1929 may be called the period of experimentation and unplanned growth. During this period land mortgage banks were organised under the Cooperative Societies Act in Punjab, Madras, Mysore and Bombay. Assam and Bengal developed them to a very limited scale. By 1930, there were 42 of them. By 1929, a Central Land Mortgage Bank started functioning and had a membership of 19 functionaries. In Bombay three Land Mortgage Banks were organised in 1929. Mysore had started Central Land Mortgage Bank and several primary banks in the same year.
The period 1930-39 was one of trials and tribulations for the land mortgage banks which were just beginning to function. They were organised practically in all the major provinces. Towards the middle of 1939 there were 226 land mortgage banks with a membership of 80,000.
The period, 1939-50, comprised the war and the post-war period. The war period was comparatively one of stability for the land development banks. Since then the number of the Central and Primary Land Development Banks Increased to 5 and 286 in 1950-51, to 18 and 463 in 1960-61, to 19 and 740 in 1968-69, to 19 and 856 in 1973-74, and to 20 and 893 in 1976-77. Their membership rose to 34,579 and 213,814 in 1950-51 to about 300,000 and 900,000 in 1973-74.
The L. D. Bs. have specially liberalised their policies in favour of small and Marginal Farmers by providing easier repayment periods, lower percentage of loan payment, liberalised share capital ratios and eligibility on the basis of incremental income.
The L. D. Bs. have been re-orienting their policies and procedures from the earlier security oriented system to an investment analysis system. The Committee on Co-operative Land Development Banks had made detailed suggestions for improving the loaning policies and procedures.
The Committee on Integration of Co-operative Credit Institutions has recommended the integration of the two wings of the co-operative credit structure at all levels, i.e. primary intermediate (direct) and apex (state) in a phased manner. The Committee has also suggested a pattern of effecting integration. The legal framework and amendments to bye-laws of co-operative credit institutions and other relevant Act.
Evaluation of the Working of the Banks:
These banks suffer from certain drawbacks:
1. High Overdues:
The main factor inhibiting the growth of land operations of these banks is the high incidence of overdues. In 1976-77, the loans outstanding stood at Rs. 1117.52 crores, as against Rs. 919.15 crores in 1973-74; Rs. 402.15 crores in 1968-69; Rs. 37.74 crores in 1960-61 and only Rs. 6.59 crores in 1950-51.
The position of overdues exceeded 50 per cent of the demand in Assam, Rajasthan, Karnataka, M. P., Orissa, Maharashtra, and West Bengal. Even in other states, the situation was not satisfactory. The inadequate staff, less use of coercive measures for recoveries, the repeated failure of rains and drought conditions in most parts of the country have been the main causes for high overdues.
2. Uneven Development:
The development of L. M. Banking has not been uniform in all the states. There are at present 20 State Co-operative Land Development Banks, one in each state (excepting Manipur, Meghalaya, Nagaland and Sikkim with 1714 branches affiliated primary land development banks operating at the district/taluka/block level.
From the point of view their number, membership, loans granted owned funds or profits, it is found that good progress has taken place in certain states while in others it has been quite poor. In many states (such as West Bengal, Assam, U. P., Punjab, and Rajasthan) less than 2 per cent of the cultivating households have become members of these banks. In other states the proportion of members joining these banks is very low. In many states, the banks have not yet reached the tehsil level.
3. Management Structure not Uniform:
Despite the fact that almost all the banks are co-operative societies, the management structure is not uniform.
This has been due to:
(i) Absence of elected representatives of the members on the Managing Committee of the land development; banking section in the case of Central Banks operating as agents of the Apex L. D. Banks;
(ii) Irregular meetings of these Committees or Boards; and
(iii) Lack of interest in the working of the institutions on the part of the members of these bodies including the official nominees.
4. Inadequacy of Funds:
The Banks suffer from inadequacy of funds. More than 80 per cent of the working capital of almost all the banks consist of borrowed funds. The small business turnover, due to inadequacy of finance make it difficult for the banks to employ adequate and experienced staff for scrutiny of loan applications and supervision over the utilisation of loans.
5. Delay in Granting of Loans:
There is a great delay (often of 6 to 9 months) in sanctioning and granting of loans. The causes of delay at the sanctioning stage are- the ignorance and lethargy of the borrowers in respect of submission of the loan applications and relevant documents; lengthy and time-consuming process that is taken in the scrutiny of titles; lack of frequent meetings by the management and lack of full authority with the managing committee to sanction loans for higher amounts; and the non-compliance of conditions stipulated in the loan sanction orders.
6. Defective Loaning Operations:
The procedure of determining the loan eligibility of a farmer is still security oriented rather than production-oriented. There is no uniform policy for assessing the repaying capacity of the borrower and the value of the land. In most of the states the cost of improvement and incremental income due to the proposed improvements are not taken into account.
7. High Cost of Credit:
A serious defect of the L. D. Banking is the high cost of credit which does not permit the farmer of ordinary means to take advantage of such credit. Cost of credit comprises interest and share of charges to be borne by the borrower at the time of taking loans; flat fees made to cover the administrative expenditure incurred in making out legal forms; the cost of searching records for determining whether the security offered is free from encumbrances and the cost of recording the credit instruments such as mortgages on the books of the primary banks.
8. Lack of Supervision and Inspection:
The machinery for supervision is not only inadequate in most of the States, but in many P. L. D. Banks, even the secretaries and managers are generally untrained and the Directors have not the necessary experience and ability to manage and guide the affairs of the banks effectively. Thus there is an utter lack of administrative and supervisory staff of right type and the requisite scale. Therefore, a full check on the utilization of loans is rather difficult.
9. Non-Viable Units:
Many of the banks are not viable units. To be a viable unit with an average margin of about 1 1/2%, a primary L. D. Bank should have a business of Rs. 20 lakhs. Larger number of primary units do not satisfy this criterion.
10. Small Farmers not Benefited:
These banks have not been able to benefit the small and medium sized farmers. A large majority of the loans, according to the All India Review Committee, have been obtained by those who have more than five acres of land.
11. Unhelpful Attitude of the Registrars:
In many States, the unhelpful and non-cooperative attitude of the Registrars/sub-registrars, has also affected the efficient working of these banks, as undue to delays in granting Encumbrance Certificates has led to delay in scrutiny of the applicants and the grant of loans.