PROJECT REPORT on

Rising NON-PERFORMING ASSETS IN COOPERATIVE

BANKS

Submitted by- HARSHAL SINGH

Roll No.-
Sec- F

1
 Index

Sr No. Chapter Page No.

1 Introduction 6-8

2 History 9-12

3 Introduction to NPA 13-16

4 Aims and Objectives 17-19

5 Evaluation of Cooperative Banks 20-23

6 Impact and Causes for NPAs 24-26

7 Extent of NPAs 27-31

8 The Way Out 32-38

9 Recommendation and Conclusion 39-41

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 ACKNOWLEDGEMENT

I take this opportunity to acknowledge the assistance and contribution of the people

who had faith in this project.

I am extremely thankful to my faculty guide, Prof. Gautam Sinha, Bengal

Institute of Business Studies, Kolkata. His constant guidance helped me overcome

many barriers in the course of my study. I am fortunate to have got such encouraging

guides who made me push my limits and strive for bigger accomplishment.

I would also like to thank my parents for their unwavering support and

encouragement throughout my course.

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 DECLARATION

I, the undersigned, hereby declare that the Dissertation Report entitled “Rising NPAs in

Cooperative Banks” is a record of an independent work carried out by me for the

Dissertation project for MBA course.

The information contained herein is true and original, to the best of my knowledge.

Place:
Date:

---------------------------------------- --------------------------------------
Signature of the Guide Signature of the student

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 CERTIFICATE

This is to certify that Harshal Singh (Reg. No. of 2018-2020) of

Bengal Institute of Business Studies has presented a research paper entitled “Rising NPAs in
Cooperative Banks”. He has done this completely on his own and it is an original work and
not copied from any resource.

Thanking you.

Yours truly,

-------------------------------------------------------------

Professor

Bengal Institute of Business Studies

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CHAPTER: 1:
INTRODUCTION OF BANKING
The development of banking is an inevitable precondition for
thehealthy and rapid development of the national economic structure. Banking institutions
have contributed much to the development of the developed countries of the world. Today we
cannot imagine the business world without banking institutions. Banking is as important as
blood inthe human body. Due to the development of banking advances areincreased and
business activities developing so it is rightly said, " The development of banking is not only
the root but also the result of
thedevelopment of the business world." After independence, the Indiangovernment also has
taken a series of steps to develop the banking sector. Due to considerable efforts of the
government, today we have a number of banks such as Reserve Bank of India, State Bank of
India, nationalised commercial banks, Industrial Banks and cooperative banks. Indian Banks
contribute a lot to the development of agriculture, and trade and
industrialsectors. Even today the banking system of India possess certainlimitations, but one
cannot doubt its important role in the development of the Indian economy.

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INTRODUCTION OF CO-OPERATIVE BANK
Unlike commercial banks which are engaged in serving theindustrial and commercial sectors
of the economy, the cooperative banks, on the other hand provide credit and allied facilities to
the rural andagricultural sectors. The dawn of this country saw the evolutioncooperative
movement in India. Cooperative societies came into being when the Cooperative Societies Act,
1904, was enacted. The movement was started with the aim of providing farmers funds with
low rates of interest so that exploitation by the village moneylenders is foiled. The Act
provided for the formation of cooperative credit societies and anumber of small primary credit
societies were established in various
partsof the country. These societies, however, could not mobilise enoughresources as
compared to loans demanded by its members. This led to the enactment of a new act in 1912.
The Cooperative Societies Act of
1912 provided for starting Central Cooperative Banks with headquarters located in urban
centres. In 1914, necessary steps were taken by the then government to strengthen the
cooperative movement. The
governmentappointed the Maclagan Committee to look into and makerecommendations for
the improvement of a State Cooperative Bank for each State. The state Cooperative Bank is
formed by the federation of Central Cooperative Banks functioning at the district level. The
present organisation of the cooperatives in India is based on the recommendation made by the
Maclagan Committee. In 1919, the Montague
ChemsfordAct made Cooperation a provincial subject. Since then, separate Cooperative
Societies Acts have been passed by all state governments. Although cooperative banks in India
have shown progress sincetheir establishment, there still exists a number of defects in the
organisation. This has led qualitative improvement to suffer. However, the Reserve Bank of
India took the initiative to revitalize, reorganize and promote the growth of cooperative
banking in India. Under the Banking Regulation Act of 1949, Cooperative banks have
been brought under the control of the Reserve Bank of Bank. Farmers in India are scattered all
over the country and need short-term small borrowings for agricultural purposes. This need is
not fulfilled by commercial banks which are unsuited for financing agriculture. Land which
these farmers can offer to cover bank advances is not generally accepted as security by
commercial banks. Therefore, special types of banks are necessary for the financing of
agriculture. Co-operative banks are best suited for this purpose. The object of co-operative
banks is tooffer banking facilities to persons of limited means requiring credit for productive
purposes in the use of the land and labour at their disposal. The co-operative banking structure
in India may be divided into three component parts, viz.,
1.Primary co-operative credit societies.
2. Central / district co-operative banks.
3.State co-operative banks (also called as apex banks) at the top
Structure of Cooperative Banking:
There are different types of cooperative credit institutions working in India. These institutions
can be classified into two broad categories- agricultural and non-agricultural. Agricultural
credit institutions dominate the entire cooperative credit structure.

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Agricultural credit institutions are further divided into short-term agricultural credit institutions
and long-term agricultural credit institutions.
The short-term agricultural credit institutions which cater to the short-term financial needs of
agriculturists have three-tier federal structure- (a) at the apex, there is the state cooperative
bank in each state; (b) at the district level, there are central cooperative banks; (c) at the village
level, there are primary agricultural credit societies.
Long-term agricultural credit is provided by the land development banks. The whole structure
of cooperative credit institutions is shown in the chart given.
Objectives of the Project:
 The main objective of behind this project is to analysis the actual position of NPA
deeply in Central Cooperative Banks.
 To know about the NPA classification and provisioning requirement for non-
performing asset
 To calculate the total non-performing asset and compare with other banks and on the
basis to decide the growth rate of different bank.
 The main object is known about the proper system of cooperative banks for reducing
non-performing asset or for conversion of non-performing asset.
 To know the various and strategies for non-performing asset for the bank.
 To learn about how to solve the problem of non-performing asset

Methodology of the Project

This project is prepared on Non-Performing Assets of Cooperative Banks. The methodology
used in this project is as follows:
 First of all, I have the studied the basic concept of NPA.
 After the introduction, the asset classification is described and the provisioning norms
for it by NABARD are shown.
 Then according to NPA statement the NPA analysis is done on the basis of previous
year’s financial data.
 Comparative statement on the basis of various ratios is done.
 At, last the recovery part is shown & various reasons, strategies, warning signals,
recovery procedure and steps for reducing NPA are included.

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Chapter 2:
History of the Cooperative Banks
The concept of cooperation owes its origin to the history of mankind which is an instinct to
work in a group helping each other in the times of difficulties. This principle has given rise to
the groups of individuals working for a common goal, laying down principles voluntarily
agreeing to pool their resources for mutual benefit. Such a group managed by the members
themselves is modern day cooperative society.
Historically cooperative movement is believed to have started with the formation of Fenvick
weavers’ consumer cooperative in 1769 in Iyre shore Scotland. The movement then travelled
around world gaining momentum thus becoming visible in social, cultural and economic
sectors. In India, Cooperative movement is almost century old because it was in 1904 when
first law, regulating the working of cooperative societies, was promulgated by British India
Government. The first society registered, under this law, was in Kanji poorum now in Tamil
Nadu. Afterwards the registration of cooperative societies helped in institutionalizing of
lending through banking institutions formed on the basis of principle of cooperation hence
giving to birth one of the largest banking structures in India having base as primary credit
societies, in middle the District Cooperative Banks and Apex as Central Cooperative Banks.
This banking structure is vast network spread in all geographical areas of India carrying the
banking operations for a vast population segmented in communities or geographical areas.
These cooperative Banks can be categorized under three headings.
*Urban cooperative Banks (UCBs)
*Rural cooperative Banks (RCBs)
*Multi state cooperative Banks (MSCBs)
These Banks have a dual regulatory control of State Government through registrar of
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cooperatives (ROC) and Reserve Bank of India(RBI). The ROC regulates the
ownership/Management affairs while as the RBI supervises the regulation with regard to
banking operations.
Right from 1947 the Govt. of India (GOI) has been guided by recommendations of various
expert committees to bring in reforms in Cooperative banking sector owing to high rate of
failures in this segment. The first of such committee formed was Saraiya Committee (1948)
and main discussion of these committees was that how the full potential of these institutions
could be best exploited for development of rural and urban independent India. Following
recommendations, the working of these banks the Government acting through regulator often
tightened noose by laying stringent norms on various occasions. In the recent report published
by RBI a continuing concern has been expressed on working of cooperative institutions. The
report speaks them of being often plagued by financial health conditions. It also reports that
following consolidation by UCBs the size of their balance sheets has increased while their
number has reduced to 1574 as on 2015-16 from 1579 as on 2016-17. Further reports confirm
that the profitability had come under serious stress because of detiorating asset quality in line
with other players in the segment. However, to improve upon the working RBI launched
recently some steps which included issuing of license to unlicensed banks and a financial
assistance programme in 2016 to help the UCBs intending to shift over to centralized banking
solutions. Again, the reports by RBI declare that number of rural cooperative institutions has
come down from 94718 in 2013-14 to 93913 in 2015-16 which includes State Central
Cooperative Banks (SCCBs), District Central Cooperative Banks (DCCBs) and primary
agricultural cooperative societies (PACs). These institutions observed a slowdown in their
growth however experiencing a sharp increase in their operating expenditure.
Though an improvement in NPA %age from 2013-14 is being observed across spectrum of
DCCBs and SCCBs along with PACs yet it is felt a lot of improvement is needed to better the
prevailing conditions in this important segment. Also, the continuing declining market share
of cooperative institutions in banking is a depiction of the trend that the credit disbursal has
been growing in large ticket size loans from commercial banks rather than to small borrowers
from cooperative sector which almost caters to 70 percent of population. This trend is
continuously reported by RBI in both the declining market share of UCBs and RCCBs/DCCBs
alike.
Foregoing discussion has clearly brought in open the picture of cooperative banking with
regard to its operational mechanism, advantages and problems faced every time. It is evident
that this banking structure still is like lifeline to a vast urban and rural population in terms of
providence of banking facilities yet we are aware that GOI on various occasions tried to
resurrect an alternative banking structure to match it so that in case of any failure the crisis
bound to erupt could be averted. These attempts were followed repeatedly first after
nationalization of banks, in 1969, when commercial banks were asked to move to unbanked
areas for branch expansion and then with incorporation of Regional Rural Banks after
enactment of RRB act in 1976.
Again understanding the problems faced by cooperative banking one needs to segregate these
banks into urban and rural category because both need to be understood and handled separately.
The urban scenario is that most of UCBs are community controlled having poor management
and lack of supervisory controls. Most of the cure of the problems of these banks lies in
tightening supervisory controls with a strict action against persons who are responsible for
failures like failure of Madhavpur Central Cooperative Bank of Gujrat. Secondly the rural

10
phenomenon is that these banks need multipronged strategy like recapitalization and
augmentation of human capital by upgradation of skills along with close monitoring to enforce
supervisory control regulations. In both the scenarios the professional management of UCBs
and RACBs along with PACCs needs to be upgraded and the Governments at state and central
level have to earmark funding for the purpose. The budget 2018-19 of J&K has laid down the
way which needs to be followed by other State Governments to revitalize the cooperative
banking in rural areas. Now the stake holders of Cooperative sector in J&K need to capitalize
on this opportunity so as the cooperative banking continues to play its role in providing the
credit delivery to its shareholders in rural areas of state by pooling its resources from its
membership.
Concluding cooperative movement is as old as human race and it is going to remain there in
every sector of human interface including banking with its downs and resurgence with varying
vigour and vitality
The cooperative movement was started in India to encourage and promote savings and
mortgage in order to help for the development of people with few resources, such as farmers,
artisans and other segments of society. During the British Government, based on Sir
Frederick’s recommendations, Nicholson (1899) and Sir Edward Law (1901), paved the way
for the creation of credit unions in rural and urban areas. Under this law, only primary credit
companies were allowed to register and without credit and federal primary credit union
organizations were excluded.
After independence, during the first 3 years, i.e. until 1949, it was not possible to achieve
significant development. It was mainly due to the problem created by the partition and the
absence of a concrete program for national reorganization. However, the leaders of free India
could see the importance of the cooperative movement for a successful democracy. The
importance was given to strengthen the cooperative structure of the country and different
provisions were made through a different five-year plan.
While the initial Five-Year plans couldn’t shape up the co-operative banks to function, it was
given greater importance from then on. The Sixth Plan established a points program for
cooperative societies. Its goal was to transform the societies of primary peoples into polyvalent
societies:
1. Rebuild the policies and the cooperative so that it can generate the economic
development of people
2. Extend cooperation activities in the areas of food processing, poultry breeding, milk
production, fisheries and many other related fields.
3. Provide training and guidance necessary for the development of qualified and efficient
personnel.
The Seventh Plan has also given more importance to the growth and expansion of cooperative
societies to ensure public participation and achieve its main objective, that is, the movement
towards social justice must be faster and must focus more on employment and the alleviation
of poverty.
(With reference to Surat District Central Cooperative Bank)

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First decade of 20th century has a very important place in the history of cooperation for entire
country and Surat District as well. Many
cooperation institutions were initiated during this period. First co-op. Society in Surat District
was registered at Degam, Taluka Chikhli ondated 23-5-1906 (Now in Bulsar District). In the
year 1908, with the efforts of Late Shri B.A.Modi and ShriK.G.Desai. The Surat Dist co-op.
union Ltd., was registered on dated 17-6-
1909. It was this institution which is known as THE SURATDISTRICT CO.OP. BANK LTD.
When the Union was empowered to establish new societies etc. By1921 The Surat District
co.op. (Urban) union was initiated. In 1923 The Surat District Co.op. Bank Ltd., The work
extended to the entire Surat District, which had 21 talukas and a vast working area with
geographical variation. The coastal area which included city of Surat and towns like Navasari
- Bulsar - Bilimora the fertile flat and then totally tribal area with hills and dense forests. The
Vast Surat District was bifurcated in 1965 and of Bulsar was separated. At present there are 14
talukas in the district, of which 9 are in the tribal area. Bank had a separated department for
agriculture advances form 1944
and become an effective central agency for coordination andsmooth flow of finance to
cooperative sector in the district. After 1960 when shree Khedut Sahakari Khand Udyog
MandaliLtd., Bardoli came into existence, the entire Surat District gradually become a sugar
belt. All exiting eight-sugar factories had teeth in the
financial troubles in the beginning, Bank had provided them enough finance and assistance
even for share capital also. By lapse of time Sugar cane has now become now become principal
crop in the district our of total cultivable area of 419000 hectares 89800 hectares is under
sugar cane cultivation. This revolution in agriculture was amply supported by The Surat
District Co.op. Bank Ltd., These factories have become main strength of the economic structure
of the district, particularly for farmers. Totally together these factories have a crushing capacity
of 37500 tons per day. Annual sugar production exceeds Rs.500/- crores. Bank has sanctioned
limits exceeding Rs.300/- crores to this sector.
The cooperative banks, however, differ from joint stock banks in the following manner:
(i) Cooperative banks issue shares of unlimited liability, while the joint stock banks issue shares
of limited liability.
(ii) In a cooperative bank, one shareholder has one vote whatever the number of shares he may
hold. In a joint stock bank, the voting right of a shareholder is determined by the number of
shares he possesses.
(iii) Cooperative banks are generally concerned with the rural credit and provide financial
assistance for agricultural and rural activities. Joint stock companies are primarily concerned
with the credit requirements of trade and industry.
(iv) Cooperative banking in India is federal in structure. Primary credit societies are at the
lowest rung. Then, there are central cooperative banks at the district level and state cooperative
banks at the state level. Joint stock banks do not have such a federal structure.
(v) Cooperative credit societies are located in the villages spread over entire country. Joint
stock banks and their branches mainly concentrate in the urban areas, particularly in the big
cities

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Chapter: 3
Introduction of Non-Performing Assets
What is NPA?
A non-performing asset is defined generally as a credit facility in respect of which interest or
instalment of principal is in areas for two quarters or more, however, in respect of agriculture
advances if interest has not been paid during the last two harvest seasons (covering two half
years) after it has become a past due (i.e. days beyond the due date). Such advances should be
treated as NPA. It is important to note that the overdue instalment only as per the guidelines of
RBI on prudential norms.
Standard assets
Standard assets are one which does not disclose and problem and which does not carry more
than normal risk attached to business. Thus, an asset, which is not NPA, may be treated as
standard or Good assets. Such account holders/customers pay interest in cash regularly on
prescribed dates and repay the amount of instalment of loan on the due dates or before the grace
period if granted.
Sub-standard asset
A non-performing asset may be classified as sub-standard asset when the asset had remained
overdue for a period not exceeding three years. An asset where the terms and conditions of the
loans regarding payment of interest and repayment of principals have been renegotiated or
rescheduled should be classified as substandard for the last two years of satisfactory
performance. Performance can be judged from the recovery of interest and repayment of
installment of principal of loan credit facility.
Double Asset
A non-performing asset may be classified as doubtful asset when the asset had remained
overdue for a continuous period exceeding three years.
Loan asset
Loss asset are those where loss was identified by the bank auditor/RBI/NABARD inspections
but the amount has not been written off wholly or partially. An asset which is considered
unrealizable and/or of such little value that its continuance as a doubtful asset is not worthwhile,
should be considered as loss asset.
Past Due
A credit facility is treated as past due when it remains outstanding for days beyond the due
date. In agriculture crop loans due dated are fixed in accordance with harvesting seasons
different types of copies I.e. kharif Corp., cash crop rabi crop etc. In investment term loan due
dates or fixed after some grace period depending the returns to be derived from investment.
Norms for Treating Loans/Advances as NPA for the purpose of Asset Classification

13
A credit facility is treated as past due when it remains outstanding for Days beyond the due
date, A non-performing asset (NPA) is defined generally as a credit facility in respect of which
interest or instalment of principal is in arrears for quarters or more.
Treatment of Agricultural Advances
In respect of advances granted for agricultural purposes where interest payment is on a half
yearly basis, in other words, if interest has not been paid during the last two seasons of harvest
(covering two half years) after it has become past due when such an advance should be treated
as NPA.
Treatment of Advances for a Allied Agricultural Activities As Well As the Non-Farm
Sector
Credit facility granted for other allied agricultural activities as well as for non-farm sector
activities should be treated as NPA, if number of instalments of principal and/or interest remain
outstanding for a period of 30 days beyond two quarters from the due date.
Term Loans (All Types)
Loans in respect of which interest or instalments of principal amount remained as overdue for
two quarters as on balance sheet date may be treated as NPA.
Project/Housing Loans, Etc.
In respect of project (industry and plantation, etc.) where moratorium is given for payment,
loans become due only after moratorium or gestation period is over i.e. such a loan becomes
overdue if instalment is not paid on due date. Similarly, in case of housing loans or similar
advances granted to staff members where interest is payable after recovery of principal, such
loans should be classified as overdue(NPA) when there is a default in repayment of principal
on due date of payment and overdue criteria will be the basis for classification of asset.

TREATEMENT OF DIFFERENT FACILITIES TO BORROWER AS OVERDUE

(NPA)
Short term agricultural advances are granted by SCBs to PACS for the purpose of leading. In
respect of advances as well as advances for other purpose, if any, granted under lending system,
only that particular facility which become irregular should be treated as overdue (NPA) andnot
all other facilities granted to a borrower, all such loans should be become overdue (NPA) even
if one loan a/c becomes overdue (NPA).

Norms for Asset Classification

Criteria for Asset Classification- Classification of agricultural and non-agricultural loans is
required to be done into four categories, on the basis of age overdue, as under.
Good/standard Assets

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Good asset is one which can not disclose any problem and which does not carry more than
normal risk attached to business. Thus, in general, all the current loans, ST agricultural and
non-agricultural loan which have not become NPA may be treated as standard asset.
Sub-standard Assets
A non-performing may be classified as sub-standard on the following basis of criteria.
1)An Asset which has remained overdue for a period not exceeding 3 years in respect of both
agricultural and non-agricultural loan should be treated as sub-standard.
2)In case of all types of loans, where instalments are overdue for a Period not exceeding 3
years, the entire outstanding in term loan should be treated as sub-standard.
3)An asset, where the terms and condition of the loans regarding payment of interest and
repayment of principal have been renegotiated rescheduled after commencement of production,
should be classified as substandard and should remain so in such category for at least two years
of satisfactory performance under the renegotiated terms in other words, the classification of
asset should be upgraded merely as a result of rescheduling unless there is satisfactory
compliance of the above condition.
Doubtful Asset
A non-performing asset may be classified as doubtful on the basis of following criteria.
1)An Asset which has remained overdue for a period exceeding 3years in respect of both
agricultural and non-agricultural loans should be treated as doubtful asset.
2)In case of all type of loans, where instalments are overdue for more than 3 years, the entire
outstanding in terms of loans should be treated as doubtful.
Loss Asset
Loss asset are those where loss is identified by the bank inspectors but amount has not been
written off wholly or party. In other words an asset which is considered un realizable or such
little value of its continuance as a doubtful asset is not worthwhile, should be treated as a loss
asset such loss asset will include overdue loans in which cases-
1)Decreases of executions petitions have been time barred or documents are loss or no other
legal proof is available to claim the debt.
2)Where the members and their sureties are declared insolvent or have died leaving no tangible
assets.
3)Where the members are left the area of operation of the society leaving no properly and their
securities have also no means to pay the dues.
4)Where the loans are fictitious or when gross utilization is notified
5)An amount which cannot be recovered in case of liquidated societies.
Provisioning Norms on the basis of Asset Classification
1)Provisioning is necessary considering the value of security charges to the banks over a period
of time. Therefore, after the assets of SCBs are classified in to various categories necessary

15
provision has to be made for the same. The details of provisioning requirements in the respects
of various categories of assets are mention below.
2)The following aspects, however, may be kept in view while making provisions.
A. Agricultural Loans as Secured
All agricultural loans may be treated as fully secured as the same are disbursed against charge
on land as provided in the respective state co-operative societies rules.
B. Treatment to P.F. and gratuity Amount
Liability towards PF and gratuity should be estimated on actuarial basis and fully provided for.
C. Loans exempted from provisioning
Advances against term deposit NCSs eligible for surrender, life policies are exempted from
provisioning. Therefore, the above account may not be classified as NPA.
D. Loans against gold/Govt. securities
Advances against gold, government securities are exempted from provisioning requirements.
E. Depreciation in investment-accounting procedure.
The investment portfolio of the bank would normally consist of approved securities and other
shares, debentures and bonds of co-operative and other institution. Investment in the approved
securities should be bifurcated into permanent and current investments. Permanent investment
are those, which banks intend to hold till maturity and current investment are those, which bank
intend to deal in, that buy and sell 0 day-to-day basis. Bank should keep not more than 50% of
their investment in permanent category. While the depreciation in respect of permanent
investment is not likely to affect their realizable value of maturity, depreciation need not be
provided for investments in the permanent category. Investment in the current category should
be carried at lower of cost value or market value, on a consistent basis. Depreciations in the
current investments, if any, therefore be fully provided for. Banks following a more prudent
method of valuation (e.g. all the investments marked to market) should continue to do so and
there should not be any slip back in their case. Investment should be shown in the balance sheet
net of depreciation. It is however, open to bank to show the book value of investment, the
depreciation against and net amount of investments separately. As regard valuation of securities
other than approved securities they should be valued at lower of cost price or market values.
Investments in the shares of co-op. institutions, however, may be valued at carrying cost price.

16
Chapter: 4
Aims of Cooperative Central Banks
 They function with the rule of “one member, one vote” and function on “no profit, no
loss” basis
 It performs all the main banking functions of deposit mobilization, the supply of credit
and provision of remittance facilities
 It provides financial assistance to the people with small means to protect them from the
debt trap of the moneylenders
 It is engaged in tasks of production, processing, marketing, distribution, servicing and
banking in India
 It supervises and guides affiliated societies
 Mobilization of funds from their members
 Advance loans to the members
 Rural financing for farming, cattle, milk, hatchery, personal finance, etc.
 Urban financing for Self – employment, Industries Small scale units, Home finance,
Consumer finance, Personal finance.

Developments in Cooperative Banks

India is a developing country facing number of problems, such as the population explosion,
low productivity, inequalities, low living standards, inflation and so on. India consisting of
16% of the world’s population sustains only on 2.4% of land resource. Agriculture sector is the
only livelihood to the two third of its population which gives employment to the 57% of work
force and is a source of raw material to large number of industries. "After 60 years of
independence taking into concern these problems, the growth of the Indian economy is rather
slow, or the solution and for rapid economic development, it was necessary to accept a mixed
economy as an economic system for the balanced growth of public and private sector together
with a major role for co-operative societies to contribute their nit in the process of economic
development. In the context of globalization of rural development perspectives, the developing
countries like India, needs to devote greater attention towards rural development. The country’s
economic structure is undergoing fundamental changes as a result of the policy of liberalization
and de-regulation. The objectives of the new economic policy are to impart a new element of
dynamism to agriculture, trade and industry, to encourage foreign investment and technologies
for making Indian products competitive in the international market to improve the performance
of public undertaking and to influence co-operatives, since co-operatives work as an essential
part of the country’s economic structure. It is hoped that the co-operative movement will
respond to the changes and develop firm self-discipline.
RURAL credit cooperatives were born more than a hundred years ago and have been decisive
in providing agricultural credit, especially to small and marginal farmers and to agricultural
workers. As on March 31, 2013, the short term credit cooperative structure (STCCS) comprised
92,432 primary agricultural credit cooperative societies (PACS), 370 district central
cooperative banks (DCCBs) and 31 state cooperative banks (StCBs). Though cooperatives are
providing only 17 percent of agriculture credit, their share in total number of agricultural
accounts held by the banking system is substantial. Cooperatives provided agricultural credit

17
to 3.08 crore farmers during 2011-12, compared to only 2.55 core farmers for commercial
banks and 82 lakh by the regional rural banks (RRBs). These included 67 lakh new farmer
financed during 2011-12, compared to 21 lakh for commercial banks and nine lakh for RRBs.
Cooperative exposure to small and marginal farmers is 66 percent out of its total loan portfolio,
far better than commercial banks’ exposure to these categories at 55 percent. It is interesting to
note that per account loan disbursed by cooperatives was Rs 28,467 (2011-12), compared to
Rs 1.15 lakh for commercial banks and Rs 66,000 for RRBs. This signifies that cooperatives
are supporting more people of the neglected, weaker and excluded categories of small and
marginal farmers. These, as in 2010-11, accounted for close to 85 percent of total landholdings
and 44 percent of total cultivable area in our country. Also, compared to commercial banks and
RRBs respectively, the share of cooperatives in term deposits was about 10 percent and 17
percent higher.

ON SHORT TERM
COOPERATIVE CREDIT
Based on the recommendations of Dr Prakash Bakshi’s report on short term cooperative credit
structure, the National Bank for Agricultural and Rural Development (NABARD) issued a
circular on July 22, 2013, advising all the state and district level cooperative banks that the
PACS (base level of the three tier short term institutional credit delivery system) must be made
to function as business correspondents (BCs) of the middle tier, i.e. district central cooperative
banks. But this would mean abolishing the independent status of the PACS which are the most
important and vibrant financial institutions at village level in meeting the credit needs of the
peasants. Several committees have so far affirmed the unique role of PACS; these included the
latest Dr Nachiket Mor committee on comprehensive financial services for small businesses
and low income households. Yet there is a deliberate attempt to weaken the institutional agri-
credit structure while the need of the hour is to strengthen it by all means.

Among the three tier structure for short term credit, state and district level bodies have on the
whole shown marked improvement on the parameters of profitability, recovery and reduction
of non-performing assets in recent years, whereas the lowest tier (PACS) is beset with some
problems. On the whole, 28 out of 31 StCBs, 318 out of 370 DCCBs and 45,433 out of 92,435
PACS were in profit as on 31 March, 2013 according to the RBI’s Report on Trends and
Progress of Banking in India 2012-13. It is also known that, with a right mix of operating
climate and institutional and credit support from the government, RBI and NABARD, around
72 percent of the PACS can become viable. However, the central government recently stopped
giving fund support to cooperatives, especially to PACS, on the plea of financial burden and in
its zeal to control the fiscal deficit.

Also, the sustainability of DCCBs and StCBSs largely depends on the lowest tier’s
sustainability. So any artificial separation of the PACS from the top two will weaken the
structure as a whole. The RBI-NABARD argument is that PACS are no banks and cannot issue
Kisan Credit Cards (KCCs) which are Aadhar card linked and information and communication

18
technology (ICT) enabled. Moreover, if PACS are made to function as BCs of the DCCBs and
StCBs, their deposits and loans can be covered only under the insurance cover of Deposit
Insurance and Credit Guarantee Corporation (DICGC). But these are mere alibi, as alternative
arrangements for DICGC insurance cover can be easily made as was done in Kerala and
elsewhere. A detailed alternative suggestion on this issue also came in 2011 from the Working
Group appointed by the Planning Commission, to which we would return later. Finding a
technological solution to the problem of integrating the PACS with the ICT enabled platforms
is quite possible if the government, RBI and NABARD are willing for it. This was what the
Vaidyanathan committee recommended.

WEAKENING OF THE
FEDERAL STRUCTURE
The Bakshi committee also recommended that the authority to remove the board of the StCBs
and DCCBs needs to vest solely with the RBI, thus seeking to ensure overriding powers for the
RBI. This may seriously weaken the federal structure of our polity, as cooperation is in the
state list of the constitution of India.
The move to weaken the PACS is also an attack on the peasantry and other rural people, leaving
these sections left at the mercy of usurious moneylenders, micro finance institutions (MFIs)
and chit funds that are mushrooming in the countryside and semi-urban areas. (At present, at
the level of PACS, these sections are nine crore strong, out of which 4.2 crore are borrowing
members.) This can have only disastrous consequences, as evident from the sordid scandal
centring round Saradha Group in West Bengal. This move is part of the government of India’s
‘reforms’ for intensifying the corporatisation of agriculture, to enable the big capital to
establish its predominance over the vast agricultural credit sector, to the detriment of the small,
middle and marginal farmers in particular.
Despite the Vaidyanathan committee’s recommendation to grant substantial fund support for
the revival of long term cooperative agri-credit structure, the centre is only dillydallying,
forming committee after committee, without any tangible decision so far. One can well
understand the importance of this structure for our country, and the prime minister himself has
lamented the declining fund support on occasions. The government needs to take an immediate
positive decision on such fund support to revive this sector for the long-term credit needs of
Indian agriculture. This was also highlighted by the Planning Commission’s working group for
the 12th plan on outreach of institutional credit, cooperatives and risk management in 2011.

19
Chapter: 5
Evaluation of Cooperative Banking: -
Progress of Cooperative Credit:
As a result of effective steps taken by the government and the Reserve Bank of India, the
cooperative banking system in India made tremendous progress after independence. The
cooperative credit which was only 3.1 per cent of the total rural credit in 1951-52, rose to 15.5%
in 1961-62 and to 22.7 per cent in 1970-71.
The total amount of short-term credit granted by the cooperatives increased from Rs. 23 crore
in 1951 -52 to Rs. 203 crore in 1961-62 and further to Rs. 1425 crore in 1979-80. Thus, during
the period of about two decades (i.e., 1960-61 to 1979- 80), the short-term and medium-term
loans increased by more than seven times.

Table 1 shows that cooperative credit increased significantly from Rs. 3874 crore in 1985-86
to Rs. 10479 crore in 1995-96, and further to Rs. 24296 crore in 2002-03. Short-term
cooperative credit increased from Rs. 2787 crore in 1985-86 to Rs. 8331 crore in 1995-96 and
to Rs. 20247 crore in 2002-03. Medium-term and long-term cooperative loans increased from
Rs. 1087 crore in 1985-86 to Rs. 2148 crore in 1995-96 and to Rs. 4049 crore in 2002-03.

Table-2 shows that during 10th Five Year Plan (2002-03 to 2006-07), agricultural credit from
cooperative banks increased from Rs. 23716 crores (34%) to Rs. 33174 crores (22%). In 2009-
10, it was Rs. 32925 crores (20%).
Importance of Cooperative Banks:
The cooperative banking system has to play a critical role in promoting rural finance and is
especially suited to Indian conditions.

Various advantages of cooperative credit institutions are given below:

20
I. Alternative Credit Source:
The main objective of cooperative credit movement is to provide an effective alternative to the
traditional defective credit system of the village money lender. The cooperative banks tend to
protect the rural population from the clutches of money lenders. The money lenders have so
far dominated the rural areas and have been exploiting the poor people by charging very high
rates of interest and manipulating accounts.
II. Cheap Rural Credit:
Cooperative credit system has cheapened the rural credit both directly as well as
indirectly:
(a) Directly, because the cooperative societies charge comparatively low interest rates, and
(b) Indirectly, because the presence of cooperative societies as an alternative agency has broken
money lender’s monopoly, thereby enforcing him to reduce the rate of interest.
III. Productive Borrowing:
An important benefit of cooperative credit system is to bring a change in the nature of loans.
Previously the cultivators used to borrow for consumption and other unproductive purposes.
But, now, they mostly borrow for productive purposes. Cooperative societies discourage
unproductive borrowing.
IV. Encouragement to Saving and Investment:
Cooperative credit movement has encouraged saving and investment by developing the habits
of thrift among the agriculturists. Instead of hoarding money the rural people tend to deposit
their savings in the cooperative or other banking institutions.
V. Improvement in Farming Methods:
Cooperative societies have also greatly helped in the introduction of better agricultural
methods. Cooperative credit is available for purchasing improved seeds, chemical fertilizers,
modern implements, etc. The marketing and processing societies have helped the members to
purchase their inputs cheaply and sell their produce at good prices.
VI. Role of Cooperative Banks before 1969:
Till the nationalisation of major commercial banks in 1969, cooperative societies were
practically the only institutional sources of rural credit. Commercial banks and other financial
institutions hardly provided any credit for agricultural and other rural activities. Cooperative
credit tothe agriculturists as a percentage of total agricultural credit increased from 3.1 per cent
in 1951-52 to 15.5 per cent in 1961-62 and further to 22.7 per cent in 1970-71.
On the other hand, the agricultural credit provided by the commercial banks as a percentage of
total agricultural credit remained almost negligible and fell from 0.9 percent in 1951-52 to 0.6
percent in 1961-62 and then rose to 4 per cent in 1970-71.
VII. Role of Cooperative Banks after 1969:

21
After the nationalisation of commercial banks in 1969, the government has adopted a multi-
agency approach. Under this approach, both cooperative banks and commercial banks
(including regional rural banks) are being developed to finance the rural sector.
But, this new approach also recognised the prime role to be played by the
cooperative credit institutions in financing rural areas because of the following reasons:
(a) Co-operative credit societies are best suited to the socio-economic conditions of the Indian
villages.
(b) A vast network of the cooperative credit societies has been built over the years throughout
the length and breadth of the country. This network can neither be duplicated nor be surpassed
easily.
(c) The cooperative institutions have developed intimate knowledge of the local conditions and
problems of rural areas.
VIII. Suitable Federal Structure of Cooperative Banking System:
Cooperative banking system has a federal structure with- (a) primary agricultural credit
societies at the village level, (b) higher financing agencies in the form of central cooperative
and state cooperative banks, (c) land development banks for providing long- term credit for
agriculture. Such a banking structure is essential and particularly suited for effectively meeting
the financial requirements of the vast rural areas of the country.
Considering the great importance of cooperative banks, particularly in the rural areas, it is not
surprising that every committee or commission, that has examined the working of the
cooperative banking system in India, has expressed the common view that “cooperation
remains the best hope of rural India.”
Evolution of co-operatives in India
Highlights and Milestones:
1.The Cooperatives were first started in Europe to serve the credit-starved people in Europe as
a self-reliant, self-managed people’s movement with no role for the Government.
2.British India replicated the Raiffeisen-type cooperative movement in India to mitigate the
miseries of the poor farmers, particularly harassment by moneylenders.
3.The first credit cooperative society was formed in Banking in the year 1903 with the support
of Government of Bengal. It was registered under the Friendly Societies Act of the British
Government.
4.Cooperative Credit Societies Act of India was enacted on 25th March 1904.
5.Cooperation became a State subject in 1919. In 1951, 501 Central Cooperative Unions were
renamed as Central Cooperative Banks.
6.Land Mortgage Cooperative Banks were established in 1938 to provide loans initially for
debt relief and land improvement.
7.Cooperatives have played an important role in the liberation and development of our country.

22
8.The word Cooperative has become synonymous for dedicated and efficient management of
rural credit system.
9.Reserve Bank of India started refinancing cooperatives for Seasonal Agricultural Operations
from 1939.
10.From 1948, Reserve Bank started refinancing State Cooperative Banks for meeting the
credit needs of Central Cooperative Banks and through them the Primary Agricultural
Cooperative Societies.
11.Only 3% of rural families availed farm credit in 1951.
12.In 1954, the All India Rural Credit Survey Committee recommended strengthening of DCC
Banks and PACS with State partnership and patronage to solve the farmers’ woes.
13.Registrar of Cooperative Societies became the custodian of Cooperatives from 1962 with
the enactment of respective State Acts.
14.Reserve Bank introduced Seasonality and Scale of Finance for crop loans and provided for
conversion, rephasement and reschedulement to tide over crop loss due to calamities.
15.The Primary Agricultural Cooperative Societies became multi purpose.
16.Reorganization of PACS into viable units, FSCS, LAMPS started under action programme
of RBI in 1964.
17.The finding of All India Rural Credit Review Committee that coverage of cooperatives is
limited to hardly 30% of farmers led to nationalization of Banks. However, Cooperatives have
played a key role in meeting the credit needs of weaker sections of farmers.
18.The establishment of Regional Rural Banks from 1975 has not reduced the problems of rural
credit as they reached only 6% of the farmers.
19.Cooperatives have contributed their part in the implementation of 20-point programme and
Integrated Rural Development Programme.
20.Though the Cooperatives were lagging behind in rural credit till 1991, they regained their
prime place with 62% share in rural crop loans between 1991 and 2001.

23
Chapter: 6
Impact of NPAs of Indian Economy, Industry and Banks
In the account books of banks, the deposits made by public are categorised as liabilities while
the loans and advances made by the banks to its customers are categorised as assets.
According to RBI those assets on which the instalments of interest or principle or both remain
overdue for a period of 90 days of more are classified as Non-Performing Assets (NPAs). In
other words, those assets of banks which have stopped performing are NPAs.
Amount of NPAs with Banks
Today, the Indian banking industry is dealing with the mammoth amount of NPAs which is
fifth largest in the world. As on June 30, 2018, the gross NPAs of the banking sector were
11.52% of the total assets while the net NPAs were 5.92%. As on March 31, 2018, the gross
NPAs were at 11.68% and net NPAs were 6.21%. Thus there is slight improvement in NPAs
this year.
Factors behind High NPA Growth
 From 2006-2011, Indian economy was going through high growth phase and
consequently there was a rapid credit growth.

During the period from 2006-2011, when GDP growth rate was an all-time high, the growth of
industrial credit was much higher. Even when the overall credit growth declined, the industrial
credit increased. When after 2011, the GDP growth mellowed down, the profit margin of
industrial sector declined and corporates started defaulting their loan payments and NPAs
started increasing.
 In 2015, RBI revised its guidelines for NPAs after which, banks had to recognise some
assets as NPAs which were earlier accounted as standard assets. This lead to the sharp

24
 increase in NPAs after 2015 merely due to accounting changes. In other words, some
NPAs were not recognised as NPAs by the banks.
Impact on NPAs on Banks
The increasing NPAs not only reduce the profitability of banks but also affect its credibility.
In fact, the massive amount of NPAs with commercial banks is threatening to erode half of the
capital base of public sector banks.
Once a bank started incurring losses and if the fundamentals are not corrected, the problem
may become chronic and destabilize the confidence of the depositors. Once the depositors start
withdrawing their money from the banks, the banking system will collapse. It is because of this
reason that NPAs must always remain within the sustainable limit and the current level of NPAs
is threatening the stability.
Higher amount of NPAs also pressurise banks to decrease the interest rate on saving deposits
to increase the margin. Already there is a gap between interest rate on bank savings vis-a-vis
savings in other non-banking accounts like PPF, post office saving schemes etc. Further,
several mutual funds are providing returns of more than 10%. Further diversion in interest rates
will divert the funds from banking sector to non-banking sector further eroding the capital with
banks.
Thus, the increasing NPAs pose long-term threats to the stability of banking sector.
Impact of NPAs on Industry
As stated earlier the credit growth to the industrial sector was higher as compared to the GDP
growth and over credit growth during the period 2006-11. As a result, the proportion of NPAs
in industrial sector was much higher vis-à-vis other sectors. Consequently, in the later phase,
banks were reluctant to fund the needs of industrial sector hampering its growth. In fact, in
some cases like that of the Micro, Small and Medium Enterprises (MSME) industry, credit
actually shrank.
The slowdown in growth in post-demonetization period also resulted in reduced profitability
of the manufacturing sector which further prompted the banks to stall the credit growth to the
industrial sector. In the long term, the shortage of funds to the industrial sector will affect the
growth of the industrial sector.
After 2014-15, the credit growth to the industrial sector is least as compared to the credit growth
to the agriculture and service sector. The continuous shrinking of credit to industrial sector is
detrimental to not only industries but overall economy as well.
Causes of NPAs: -
1. Wilful Defaults: - The Indian Public-Sector Banks are worst hit by these defaults. It is a
default in repayment obligation.
Kingfisher Airlines Ltd. Is one among many of those wilful defaulters. Other are Beta Napthol,
Winsome Diamonds & Jewellery Ltd., Rank Industries Ltd., XL Energy Ltd. etc.
2. Industrial Crisis:- Industries depend on banks to fulfill their projects. If industry is in crisis,
it is bound to hit the banking sector and their NPA will rise.

25
3. Credit distribution Mis-management: - Often ill-minded borrowers bribe bank officials
to get loans with an intention of default.
4. Lenient Lending Norms: - One of the main reasons of rising NPAs is the lenient Lending
Norms especially for corporate honchos where their financial status and credit rating is not
analysed properly.

26
Chapter: 7
EXTENT OF NPAs
Gross NPAs of domestic banks jumped to 4.2 % of total lending by the end of September 2013
from 3.6 % six months before, according to the Reserve Bank of India (RBI).
As per a recent warning by the RBI, bad loans (NPAs) could climb to 7% of total advances by
2015.
In absolute terms, gross NPAs are estimated to touch Rs 2.50 lakh crores by the end of March
this year. This is equal to the size of the budget of Uttar Pradesh. The biggest chunk of the
soured debts is with state-run banks (Public sector banks or PSBs), which account for two-
thirds of loans but 80 % of the bad assets.
This is how the NPA curve has been moving in the recent years, as per a news report in the
Business Standard:

Private-sector and foreign lenders are better placed. Their NPAs in proportion of their lending
is lesser than that of the PSBs.
WHY IT MATTERS?
The higher is the amount of non-performing assets (NPAs), the weaker will be the bank’s
revenue stream.
In the short-term, many banks have the ability to handle an increase in nonperforming assets
— they might have strong reserves or other capital that can be used to offset the losses. But
after a while, if that capital is used up, nonperforming loans will imperil a bank’s health. Think
of nonperforming assets as dead weight on the balance sheet.
Here is the impact of the NPAs:
As the NPA of the banks will rise, it will bring a scarcity of funds in the Indian security markets.
Few banks will be willing to lend if they are not sure of the recovery of their money.
The shareholders of the banks will lose a lot of money as banks themselves will find it tough
to survive in the market.

27
This will lead to a crisis of confidence in the market. The price of loans, i.e. the interest rates
will shoot up badly. Shooting of interest rates will directly impact the investors who wish to
take loans for setting up infrastructural, industrial projects etc.
It will also impact the retail consumers like us, who will have to shell out a higher interest rate
for a loan.
All of this will lead to a situation of low off take of funds from the security market. This will
hurt the overall demand in the Indian economy. And, finally it will lead to lower growth rates
and of course higher inflation because of the higher cost of capital.
This trend may continue in a vicious circle and deepen the crisis.
Total NPAs have touched figures close to the size of UP budget. Imagine if all the NPA was
recovered, how well it can augur for the Indian economy.
RBI governor Raghuram Rajan has recently said that NPAs must be curbed before the problem
becomes alarming.
1. Bank’s profit will come down which they earn in the form of interest.
2. Banks will become reluctant to lend thus affecting their borrowers.
3. Affects the liquidity position of banks.
4. Service to good customers may get affected.
5. Adversely affect the bank balance sheet.

WHY SUCH A SITUATION?

The rising incidence of NPAs has been generally attributed to the domestic economic
slowdown. It is believed that with economic growth slowing down and rate of interest going
up sharply, corporates have been finding it difficult to repay loans, and it has added up to rising
NPAs. Even finance minister P Chidambaram stated that bad loans are a function of the
economy and hence, having bad loans during distressed times is very natural.
However, The NPA mess is not entirely because of the reversal of economic cycles.
Here we look at the other reasons behind this mess. Basically the whole problem can be divided
into two parts – External problems and internal problems as faced by the banks.
External Factors
Reasons related to the corporate sector
Apart from the slowdown in India, the global economy has also slowed down.
This has adversely impacted the corporate sector in India. Continuing uncertainty in the global
markets has lead to lower exports of various products like textiles, engineering goods, leather,
gems etc. It can be noted that imports and exports combined equal to around 40% of India’s
GDP!
A hurt corporate sector is finding it difficult to pay loans

28
The ban in mining projects, delay in environmental related permits affecting power, iron and
steel sector, volatility in prices of raw material and the shortage in availability of power have
all impacted the performance of the corporate sector. This has affected their ability to pay back
loans.
Other sectors
Banks in India are highly regulated. Priority sector lending (PSL) is one of these regulations
which require the banks to give a certain % of their loans to certain sections of society. These
are farmers, SCs, STs, IT parks, MSMEs etc.
Naturally one would assume that the weaker sections covered under PSL are the ones to be
blamed for the situation. However, it is not the case.
As per recent news reports, the Standing Committee on Finance will be now examining the
reasons for high NPAS in PSBs.
The data, shared with the Standing Committee, shows that NPAs in the corporate sector are far
higher than those in the priority or agriculture sector.
Within the priority sector, incremental NPAs were more in respect to micro small and medium
enterprises followed by agriculture.
However, even the PSL sector has contributed substantially to the NPAs.
As per the latest estimates by the SBI, education loans constitute 20% of its NPAs!
The sluggish legal system (Judiciary in India) and lack of systematic and constant efforts by
the banks make it difficult to recover these loans from both corporate and non-corporate.
Internal Factors
1. Indiscriminate lending by some state-owned banks during the high growth period (2004-08)
is one of the main reasons for the deterioration in asset quality.
2. Bankers say there is a lack of rigour in loan appraisal systems and monitoring of warning
signals at state-run banks. This is particularly true in case of infrastructure projects, many of
which are struggling to repay loans. Besides, these projects go on for 20 to 30 years.
3. Poor recovery and use of coercive techniques by banks in recovering loans
4. The wait and watch approach of banks have been often blamed as the reason for rising NPAs
as banks allow deteriorating asset class to go from bad to worse in the hope of revival and often
offer restructuring option to corporates.
A Parliamentary panel, examining increasing incidents of NPAs, has observed that state-owned
banks should stop “ever-greening” or repeated restructuring of corporate debt to check the
constant bulging of their non-performing assets. Members of the panel were of the view that
NPAs are the result of bad economic situation, but there were also management issue of every-
greening of loans, which could be avoided by “not renewing loans, particularly of corporate”.
Therefore, it can be clearly seen that it is only the economic slowdown that is behind the NPAs.
There are a whole range of factors.

29
Recent Developments and Ways to Tackle NPA
 Insolvency and Bankruptcy Code (IBC) – With the RBI’s push for the IBC, the
resolution process is expected to quicken while continuing to exercise control over the
quality of the assets. There will be changes in the provision requirement, with the
requirement for the higher proportion for provisions going to make the books better.
 Credit Risk Management – This involves credit appraisal and monitoring
accountability and credit by performing various analysis on profit and loss accounts.
While conducting these analyses, banks should also do a sensitivity analysis and should
build safeguards against external factors.
 Tightening Credit Monitoring – A proper and effective Management Information
System (MIS) needs to be implemented to monitor warnings. The MIS should ideally
detect issues and set off timely alerts to management so that necessary actions can be
taken.
 Amendments to Banking Law to give RBI more power – The present scenario allows
the RBI just to conduct an inspection of a lender but doesn’t give them the power to set
up an oversight committee. With the amendment to the law, the RBI will be able to
monitor large big accounts and create oversight committees.
 More “Hair-cut” for Banks – For quite some time, PSU lenders have started putting
aside a large portion of their profits for provisions and losses because of NPA. The
situation is so serious that the RBI may ask them to create a bigger reserve and thus,
report lower profits.
 Stricter NPA recovery – It is also discussed that the Government needs to amend the
laws and give more power to banks to recover NPA rather than play the game of “wait-
and-watch.”
 Corporate Governance Issues – Banks, especially the public-sector ones, need to
come up with proper guidance and framework for appointments to senior level
positions.
 Accountability – Lower level executives are often made accountable today; however,
major decisions are made by senior level executives. Hence, it becomes very important
to make senior executives accountable if Indian banks are to tackle the problem of
NPAs.
The banks should also consider “raising capital” to address the problem of NPA.
1. Using unclaimed deposits – Similar to provisions for unclaimed dividends, the
government may also create a provision and transfer unclaimed deposits to its account.
These funds in return can be transferred to banks as capital.
2. Monetization of assets held by Banks – In this case, banks with retail franchisees
should create value by auctioning a bank assurance association rather than running it
themselves as an insurance company. The current set-up blocks capital inflows and
doesn’t generate much wealth for the owners.

30
 3. Make Cash Reserve Ratio (CRR) attractive – At present, the RBI asks Indian banks
to maintain a certain limit on CRR on which the RBI doesn’t pay interest and hence,
banks lose out a lot on interest earnings. If the CRR is made more financially rewarding
for banks, it can reduce capital requirements.
4. Refinancing from the Central Bank – The US Federal Reserve spent $700 billion to
purchase stressed assets in 2008-09 under the “Troubled Asset Relief Program.” Indian
banks can adopt a similar arrangement by involving the RBI directly or through the
creation of a Special Purpose Vehicle (SPV).
5. Structural change to involve private capital – The compensation structure and
accountability of banks create a problem for the market. Banks should be governed by
a board while aiming to reduce the government’s stake and making the financial
institutions attractive to private investors.
With the potential solutions above, the problem of NPAs in Indian banks can be effectively
monitored and controlled, thus allowing the banks to achieve a clean balance sheet.
Solution to NPA: -
1. SARFAESI Act: - The act improves the banks/Financial Institutions (FIs) t0 recover their
NPA through acquiring and disposing of the secured assets in NPA account with outstanding
amount of Rs. 1 Lakh and above.
2. DRT Act: - The act provides setting up of Debt Recovery Tribunals and Debt Recovery
Appellate Tribunals for expedition and exclusive disposal of suits filed by banks/FIs for
recovery of their dues in NPA account with outstanding amount of Rs. 10 Lakh and above.
3. Lok Adalat: - Lok Adalat mechanism offers mutually acceptable way of settlement of
disputes. Govt has advised PSBs to utilize this mechanism to its fullest potential for recovery
in NPA cases.
From time to time many Norms have been framed to get a hold over rising NPA. And these
Norms have been proved to be beneficial. But out of all these, SARFESI Act, 2002 and DRT
Act proved to be most beneficial among all.

31
Chapter: 8
WAY OUT
The simplest approach to cut down NPAs is to recover the bad loans.
Apart from the regular guidelines released by the RBI, to strengthen further the recovery of
dues by banks and financial institutions, Government of India promulgated:
1.The Recovery of Debts Due to Banks and Financial Institutions Act, 1993
2. The Securitization Reconstruction of Financial Assets and Enforcement of Security
Interest (SARFAESI) Act, 2002.
So, how can the banks legally recover their loans?
(i) The Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act, 2002 – The Act empowers Banks / Financial
Institutions to recover their non-performing assets without the intervention of the Court,
through acquiring and disposing of the secured assets in NPA accounts with outstanding
amount of Rs. 1 lakh and above. The banks have to first issue a notice. Then, on the
borrower’s failure to repay, they can:
 Take possession of security and/or
 Take over the management of the borrowing concern.
 Appoint a person to manage the concern.

(ii) Recovery of Debts Due to Banks and Financial Institutions (DRT) Act: The Act
provides setting up of Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate
Tribunals (DRATs) for expeditious and exclusive disposal of suits filed by banks / FIs for
recovery of their dues in NPA accounts with outstanding amount of Rs. 10 lac and
above. Government has, so far, set up 33 DRTs and 5 DRATs all over the country.
(iii) Lok Adalat’s: Section 89 of the Civil Procedure Code provides resolution of disputes
through ADR methods such as Arbitration, Conciliation, Lok Adalat’s and Mediation. Lok
Adalat mechanism offers expeditious, in-expensive and mutually acceptable way of settlement
of disputes.
Government has advised the public-sector banks to utilize this mechanism to its fullest potential
for recovery in Non-Performing Assets (NPAs) cases.
Among the various channels of recovery available to banks for dealing with bad loans, the
SARFAESI Act and the Debt Recovery Tribunals (DRTs) have been the most effective in terms
of amount recovered.
The recent controversy surrounding loan recovery in India – Views of the SC

Banks have been alleged to engage in coercive practices to recover the loans. Recently, there
have been some judicial pronouncements by the apex court determining the scope of powers

32
of enforcement of securities without the intervention of the courts, by the banks and FIs under
the SARFAESI Act. The apex court has reiterated the need to protect the interest of borrowers,
and emphasized that the exercise of extraordinary powers of recovery, by banks and FIs must
be in compliance with the provisions of the SARFAESI Act.
As per the Supreme Court (SC) – “” Liquidity of finances and flow of money is essential for
any healthy and growth-oriented economy. But certainly, what must be kept in mind is that the
law should not be in derogation of the rights which are guaranteed to the people under the
Constitution. The procedure should also be fair, reasonable and valid, though it may vary
looking to the different situations needed to be tackled and object sought to be achieved.”
But, these are steps which cure the disease of NPAs.

“The issue of NPAs needs to be tackled at the level of prevention rather than cure.”

Therefore, the steps that can prevent the piling up of NPAs are as follows:
1. Conservatism:
Banks need to be more conservative in granting loans to sectors that have traditionally found
to be contributors in NPAs. Infrastructure sector is one such example. NPAs rise predominantly
because of long gestation period of the projects. Therefore, the infrastructure sector, instead of
getting loans from the banks can be funded from Infrastructure Debt Funds (IDFs) or other
specialized funds for infrastructural development in the country.
2. Improving processes:
The credit sanctioning process of banks needs to go much more beyond the traditional analysis
of financial statements and analyzing the history of promoters. For example, banks rely more
on the information given by credit bureaus. However, it is often noticed that several defaults
by some corporate are not registered in their credit history.
3. Relying less on restructuring the loans:
Instead of sitting and waiting for a loan to turn to a bad loan, and then restructure it, the banks
may officially start to work to recover such a loan. This will obviate the need to restructure a
loan and several issues associated with it. One estimate says that by 2013 there will be Rs 2
trillion worth of restructured loans.
4. Expanding and diversifying consumer base by Innovative business models:
Contrary to popular perceptions,the NPA in non-corporate sector is less than that in the
corporate sector. Hence, there is a need to reach out to people in remote areas lacking
connectivity and accessibility. More and more poor people in rural pockets should be brought
under the banking system by adopting new technologies and electronic means. Innovative
business models will play a crucial role here. Otherwise, the NPAs may increase instead of
decreasing.
As said by the new M.D. of SBI, Mr. Viswanathan proposed ideas such as a single demat
account for all investments and credit cards for school students (above class 8th) to make them
aware with the banking system.

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Weaknesses of Cooperative Banking:
Various committees, commissions and individual studies that have reviewed the working of
the cooperative banking system in India have pointed out a number of weaknesses of the system
and have made suggestions to improve the system.
Major weaknesses are given below:
I. General Weaknesses of Primary Credit Societies:
Organisational and financial limitations of the primary credit societies considerably reduce
their ability to provide adequate credit to the rural population.
The All India Rural Credit Review Committee pointed out the following weaknesses of
the primary credit societies:
(a) Cooperative credit still constitutes a small proportion of the total borrowings of the farmers,
(b) Needs of tenants and small farmers are not fully met.
(c) More primary credit societies are financially weak and are unable to meet the production-
oriented credit needs,
(d) Overdues are increasing alarmingly at all levels,
(e) Primary credit societies have not been able to provide adequate and timely credit to the
borrowing farmers.

II. Inadequate Coverage:

Despite the fact that the cooperatives have now covered almost all the rural areas of the country,
its rural household membership is only about 45 per cent. Thus, 55 per cent of rural households
are still not covered under the cooperative credit system.
In fact, the borrowing membership of the primary credit societies is significantly low and is
restricted to a few states like Maharashtra, Gujrat, Punjab, Haryana, Tamil Nadu and to
relatively rich land owners.
Criteria of determining borrowing membership include:
(a) Borrowing members as a proportion of rural households,
(b) The average amount of loan issued per borrowing member, and
(c) The proportion of loans going to weaker sections.
The banking Commission 1972 has brought out the following reasons for the low
borrowing membership cooperative societies:
(a) Inability of the people to provide the prescribed security;
(b) Lack of up-to-date land records;
(c) Ineligibility of certain purposes for loans;

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(d) Inadequacy of prescribed credit limits;
(e) Onerous conditions prescribed for loans such as share capital contribution at 10 or 20 per
cent of loans outstanding and compulsory saving deposits; and
(f) Default of members to repay loans.
III. Inefficient Societies:
In spite of the fact that the primary agricultural credit societies in most of the states have been
reorganised into viable units, their loaning business has not improved. As the Seventh Plan has
observed that out of 94089 primary agricultural credit societies in the country in 1982-83, only
66000 societies had full time paid secretaries. About 34000 societies were running at loss.
IV. Problem of Overdues:
A serious problem of the cooperative credit is the overdue loans of the cooperative institutions
which have been continuously increasing over the years. In 1991-92, percentage of overdues
to demand at the level of land development banks was 57, at the level of central cooperative
banks was 41 and at the level of primary agricultural credit societies was 39.
The overdues in the short-term credit structure are most alarming in North-Eastern States. In
the long-term loaning sector, the problem of overdues has almost crippled the land
development banks in 9 states, viz., Maharashtra, Gujarat, Madhya Pradesh, Bihar, Karnataka,
Assam, West Bengal, Orissa and Tamil Nadu.
Large amounts of overdues restrict the recycling of the funds and adversely affect the lending
and borrowing capacity of the cooperative societies.

The Banking Commission 1972 pointed out the following reasons for the overdue loans:
(a) Indifferent management or mismanagement of primary societies;
(b) Unsound lending policies resulting in over-lending or lending unrelated to actual needs,
diversions of loans for other purposes;
(c) Vested interests and group politics in societies and willful defaulters;
(d) Inadequate supervision over the use of loans and poor recovery efforts;
(e) Lack of adequate control of central cooperative banks over primary societies;
(f) Lack of proper links between credit and marketing institutions;
(g) Failure to take quick action against willful defaulters; and
(h) Uncertain agricultural prices.
V. Regional Disparities:
There have been large regional disparities in the distribution of cooperative credit. According
to the Seventh Plan, the eight states of Andhra Pradesh, Gujarat, Haryana, Kerala, Madhya
Pradesh, Maharashtra, Punjab and Rajasthan account for about 80 per cent of the total credit

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disbursed. The per hectare short-term credit disbursed varied from Rs. 4 in Assam to Rs. 718
in Kerala.
VI. Benefits to Big Land Owners:
Most of the benefits from the cooperatives have been covered by the big land owners because
of their strong socio-economic position. For instance, in 1984-85 the farmers having holdings
less than two hectares got only 38.8 per cent of the total loans granted by the primary
agricultural credit societies, whereas the land owners with holdings of more than 2 hectare
received 55 per cent. The share of the poorest rural population (i.e. tenants, share croppers and
landless labours) was only 6.2 per cent.
VII. Lack of Other Facilities:
Besides the provision of adequate and timely credit, the small and marginal farmers also need
other facilities in the form of supply of inputs (i.e., better seeds, fertilisers, pesticides, etc),
extension and marketing services.
These facilities will enable them to utilise the borrowed credit in a proper way. Therefore, the
credit societies should be reorganised into multi-purposes cooperatives.
Reserve Bank and Cooperative Banking:
Strengthening the cooperative credit movement has been the Reserve Bank of India’s special
responsibility ever since its establishment in 1935.

The following are the various measures undertaken by the Reserve Bank to develop
cooperative banking system and to promote cooperative finance in the country:

1. Agricultural Credit Department:

The Reserve Bank has a separate Agricultural Credit Department whose functions are:
(i) To maintain an expert staff to study all questions of agricultural credit and be available for
consolation by the central and state governments, state cooperative banks and other banking
organisations; and
(ii) To coordinate the operations of the Reserve Bank in connection with agricultural credit and
relations with the state cooperative banks and other institutions engaged in the business of
agricultural credit.
2. All-India Rural Credit Survey:
The Reserve Bank’s real role in the cooperative credit movement started with the appointment
of All-India Rural Credit Survey Committee in 1951. The objective of this Committee was to
study the problems of rural credit and explore possibilities of expanding agricultural credit
through cooperative credit system.
The committee submitted its report in December 1954 which highlighted the vital importance
of cooperative rural credit.

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The Committee found that while private credit agencies, i.e., money lenders and traders supply
70 per cent of the rural credit, the cooperative societies provided only 3 per cent of the total
borrowed amount.
The Committee observed that the rural credit in India fell short of the right quantity, was not
of right type, did not serve the right purpose, and often fail to go to the right people. Regarding
the future of cooperative credit movement the committee said, “cooperation had failed, but
cooperation must succeed.”
3. Integrated Scheme of Rural Credit:
For the success of cooperative credit movement, the Survey Committee suggested an integrated
scheme of rural credit based on the following fundamental principles- (a) state partnership in
cooperative credit institutions; (b) full coordination between credit and other agricultural
activities, particularly, marketing and processing; and (c) administration through adequately
trained and efficient personnel, responsive to the needs of the rural population.
4. Provision of Finance:
In pursuance of the recommendations of the Survey Committee and the later committees like
the Committee on Cooperative Credit (1960), the Reserve Bank has activity helped the
cooperative system to expand rural credit. The Reserve Bank does not provide finance directly
to the agriculturists, but only through cooperative sector.
The Reserve Bank provides financial assistance for meeting short-term, medium-term and
long-term rural needs.

The needs are explained as under:

(i) Short-Term Finance:
The Reserve Bank provides short-term finance to the state cooperative banks in two ways- (a)
through loans and advances; (b) through rediscounting facility. The financial assistance is given
for seasonal agricultural operations and for marketing of crops.
In 1950-51, the Reserve Bank sanctioned short- term credit of Rs. 7.6 crore. This amount
increased to Rs. 147 crore in 1960-61 and to Rs. 1090 crore in 1981-82.
(ii) Medium-Term Finance:
The Reserve Bank provides medium-term loans to state cooperative banks generally for 3 to 5
years. These loans are provided for- (a) land improvements like bunding, digging of wells and
water channels; (b) repair of wells and other irrigational schemes; (c) purchase of livestock,
implements and machinery; (d) construction of farm houses and cattle sheds.
The Reserve Bank also provides medium-term loans in scarcity affected areas. Over the years,
the amount of medium- term loans sanctioned by the Reserve Bank has considerably increased
from Rs. 27 lakh in 1954-55 to Rs. 24 crore in 1970-71 and to Rs. 110 crore in 1981-82.
(iii) Long-Term Finance:

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The Reserve Bank provides long-term financial assistance for a maximum period of 20 years
for agriculture in there ways- (a) It subscribes a portion of debentures issued by the land
development banks. (b) It grants long term loans to such banks, (c) It grants loans to state
governments for subscribing to the share capital of cooperative credit institutions. The total
long- term loans sanctioned by the Reserve Bank were Rs. 212 crore in 1981-82.
5. Setting Up of Funds:
To meet its financial obligations, the Reserve Bank set up two national funds in 1956, i.e., the
National Agricultural Credit (Long-Term Operations) Funds, and the National Agricultural
Credit (Stabilisation) Fund.
The Purpose of the Long-Term Operations Funds was- (a) to make long- term loans available
to state governments to enable them to subscribe the share capital of cooperative credit
institutions; (b) to make medium-term loans to state cooperative banks for agricultural
purposes; (c) to make long-term loans to the central land mortgage banks against the guarantee
of the state government; and (d) to purchase debentures of central land mortgage banks against
the guarantee of state government. The Stabilisation Fund helps the state cooperative banks to
convert their short-term loans into medium-term loans in cases of draught, famine or other
calamities.
6. Strengthening of Cooperative Banking Structure:
With a view to strengthen cooperative banking structure and promote cooperative credit,
the Reserve Bank undertakes the following measures:
(i) It pays special attention towards rehabilitating and revitalising the weaker cooperative units.
(ii) It makes arrangements for maintaining the flow of cooperative credit by involving
commercial banks to finance the primary agricultural societies.
(iii) It makes efforts in improving the lending policies and operational efficiency of cooperative
credit institutions.
(iv) It provides financial accommodation to cooperative credit institutions.
(v) It conducts special training courses at the Cooperative Bankers’ Training Colleges for the
personnel of state, central and urban banks.

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Chapter: 9
Impact on Indian Economy
Strong banking sector is one of the most significant prerequisite of strong economy because it
channels the savings into the investment. A fragile banking sector will ultimately give way to
the fragile economy.
The major sectors of the Indian economy contributing to the NPAs are as under –

Because of massive amount of NPA in infrastructure, the banks are now reluctant to fund this
sector. As the infrastructure is one of the most important sectors in economy which fuels the
growth of other sectors, draining of resources to infrastructure may hamper the growth of
Indian economy.
Among the other sectors, food processing also accounted for 5.3% of total NPAs. Food
processing is one of the most employment intensive industries and its growth also pushes the
growth of agriculture. Any loss to the food processing industry will ultimately percolate to the
employment as well as agriculture sector.
Other sectors will also directly or indirectly affect the overall economic scenario due to the
exposure to the bad loans. Hence, the issue of NPA must be resolved on urgent basis.

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Suggestions
 Identifying reasons for turning of each account of a branch into NPA is the most
important factor for upgrading the asset quality, as that would help initiate suitable steps
to upgrade the accounts.
 The bank must focus on recovery form those borrows who have the capacity to repay
but are not repaying initiation of coercive action a few such borrows may help.
 The recovery machinery of the bank has to be streamlined, targets should be fixed for
field officers / supervisors not only for recovery in general but also in terms of
upgrading number of existing NPAs.
 In the bank there should be a proper manpower planning.
 Bank should try to establish the branches in competitive market, so it will increase their
profit.
 Now a day more competition increases in the market so bank should give more facility
to its customers like ATM facilities by which it can attract more and more customers.
 Bank has required increasing the cash and bank balances by reducing the unnecessary
expenses for future plan.
 Increase the advances, which is beneficial for the bank to meet cash requirements from
the outside.
 Bank should increase the deposits through the advertisement &dividend payment etc.
 At last, I suggest that bank should update its website for better marketing so customer
see the bank's position progress or create a website if they don’t have one yet.

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CONCLUSION
Looking at the giant size of the cooperative banking industry, there can be hardly any doubt
that the menace of NPAs needs to be curbed. It poses a big threat to the macro-economic
stability of the Indian economy. An analysis of the present situation brings us to the point that
the problem is multi-faceted and has roots in economic slowdown; deteriorating business
climate in India; shortages in the legal system; and the operational shortcoming of the banks.
Therefore, it has to be dealt at multiple levels. The government can’t be expected to rescue the
state-run banks with tax-payer’s money every time they fall into a crisis. But, the kind of
attention with which this problem has been received by policymakers and bankers alike is a big
ray of hope. Right steps, timely and concerted actions and a revival of the Indian economy will
put a lid on NPAs. Prevention, however, has to become a priority than mere cure.
The project on Rising Non-Performing Assets in Co-Operative Banks has been a great source
of knowledge. It has given me an opportunity to understand the
co operative financial sector. The best model for reducing the level of Non-Performing Assets
of Co-Operative Banks is by giving more emphasis for technological improvements for proper
and regular monitoring and follow up the accounts.
The recovery strategies for impaired loans need to be revised with the following
considerations by setting a time for recovery of a particular impaired loan and assigning the
responsibility to a particular person for the recovery of particular loans along with the
infrastructure and power to take action concerning to that loan.
Apart from said conclusions, the level of reduction of Non-Performing Assets can be done by
making special efforts in respect of large advances and more attention to be paid for strategies
planned by the employees with self-set goals educating the borrowers.

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