Title of Research work: Financial Performance of District Central Cooperative Banks in Punjab

Name of Scholar: Priya Goel

Subject: Management (Finance)

Registration No: 090299900251

a) Name of Guide: Dr. Anindita Chatterjee

Assistant Professor

Faculty of Management Studies

Manav Rachna International University

Faridabad

b) Name of Co Guide: Dr. Devendra Pathak

Vice Chancellor

APG Shimla University

Himachal Pradesh

Index

Contents Page No.

1. ABSTRACT2

2. INTRODUCTION3-5

3. REVIEW OF LITERATURE5-15

4. OBJECTIVES15

5. RESEARCH METHODOLOGY15

6. TENTATIVE CHAPTER PLAN17

7. REFERENCES 18-20

8. ANNEXURE-I21

Financial Performance of District Central Cooperative Banks in Punjab

Abstract:

The Indian cooperative banks have a unique position in the rural credit delivery system of India. Challenges before the cooperative banks are two folds, on the one hand they are supposed to provide cheap and timely credit to rural masses and on the other hand they have to ensure their profitability and viability in turbulent interest regime. To be able to create a balance between their social objectives and economic compulsions, these banks were needed to change working strategy. So as a result, cooperative banks have diversified their areas of operation. Business diversification process in cooperative banks started in the year 1992. A need was felt to conduct a study to know the impact of diversification on banks. For the purpose of study, The Punjab state has been divided into three homogeneous agro-climatic zones on the basis of cropping pattern, soil texture, soil quality, rainfall, underground water, etc.The sampling design of the study will be based on multistage random sampling technique. Two District Central Cooperative Banks from each zone will be selected randomly. 100 bank officials and an equal number of borrowers from all selectedDistrict Central Cooperative Bankswill be randomly selected for studying the perceptions of bank officials about non performing assets and of borrowers, the factors determining their repayment performance. Primary as well as secondary data will be collected. The secondary data will berelated to advances outstanding and non-performing advances for the period of 2001-2012 ending on 31st March.For the purpose of primary data collection, two separate questionnaires will be developed, one for bank officials and the other for borrowers.

Key Words- District Central Cooperative Banks in Punjab,non performing assets,diversification of banks,repayment performance.

Financial Performance of District Central Cooperative Banks in Punjab

INTRODUCTION

An important segment of the Indian banking set-up is the cooperative banking system. A cooperative bank is a credit agency with democratic management, responsiveness to felt needs and local participation. In cooperative parlance, a cooperative is an organization of individuals, which intends to promote economic interest of members. The cooperative banking system aims at mobilization of savings from the middle-income groups and meet credit requirements of the middle and economically weaker sections of the society. The Cooperative Credit Societies Act passed in 1904, paved the way for the establishment of cooperative credit societies in rural and urban areas. The Cooperative Societies Act of 1912 recognized the formation of non credit societies and the central cooperative organizations. The state patronage to the cooperative movement continued even after 1947, the year in which India accepted the concept of planned economy and cooperative organizations were assigned an important role. Various committees appointed to examine the problem of rural credit, came to the same conclusion. Without exception, there is no alternative, to cooperatives at the village level, in the Indian context

Indian planners considered cooperation as an instrument of economic development of the disadvantaged, particularly in the rural areas. The non-exploitative character of cooperatives, voluntary nature of membership, the principle of one man-one vote, decentralized decision making and self imposed curbs on profits, eminently qualified them as an instrument of development combining the advantage of private ownership with public good. Since 1950s the cooperation in India has made remarkable progress in the various segments of Indian economy. During the last century, the cooperatives have entered sectors like credit, production, processing, marketing, housing, warehousing, irrigation, transport, textiles and even industries. Today India can claim to have the largest network of cooperatives in the world numbering more than half a million, with a membership of more than 200 million.

The rural cooperative credit institutions may be further divided into short term credit cooperatives and long term credit cooperatives. At the central level (District level) District Central Cooperative Banks (DCCB) function as a link between Primary Societies and State Cooperative Banks (SCB). As against three tier structure of short term credit cooperatives, the long term cooperative credit structure has two tiers, in many states with Primary Cooperative Agricultural and Rural Development Banks (PCARDB) at the primary level and State Cooperative Agricultural and Rural Development Bank at the state level. However some states in the country have unitary structure with state level cooperative operating through their own branches and in one state an integrated structure prevails. Punjab has two tier structures for long term credit with Punjab State Cooperative Agricultural Development Bank at the state level and Primary Cooperative Agricultural Development Bank at the Primary level.

Under the Banking Regulation Act 1949, only state cooperative apex banks, district central cooperative banks and urban credit cooperatives are qualified to be called as banks in the cooperative sector. In other words, only these banks are licensed to conduct fully fledged banking business.

Cooperatives have played an important role in the overall economic development of Punjab. Cooperatives have engulfed almost all important areas of economic operation in Punjab whether it is agriculture marketing, agriculture processing, housing sector etc.

Being an agrarian economy, availability of cheap and easy agriculture credit is of utmost importance. In fact, two pillars of green revolution in Punjab are said to be Punjab Agriculture University (which provided technical support and guidance to the farmers) and State Cooperative Banks which provided short term credit facility to meet the working capital needs of the farmers and long term credit to meet infrastructural development needs.

The Punjab State Cooperative Bank, Chandigarh is playing a vital role in the agriculture and rural development.It has 19 branches and 1 extension counters in Chandigarh. There are 20 District Central Cooperative Banks having 804 branches all over Punjab, mostly in rural areas of the State. The unparalleled contribution made by this premier cooperative institution of the state not only helps in promoting direct employment to people but also helps in raising the economic standard of the beneficiaries. There is no arena of life where this premier institution has not played its part. From a farmer, artisan, trader man to big industrialist everybody has been covered in the fold of this institution. The green, white, blue and sweet revolutions in the State of Punjab are some of the major achievements of the state in which this institution has played a vital role. It was timely, adequate and easily accessible financial assistance to the rural peasantry in agriculture and allied activities such as dairy, poultry, sugarcane etc. which has been instrumental in making these activities most successful.

During the 1990’s, the banking scene in India has undergone tremendous changes. Narsimham Committee came out with its recommendations. It emphasized on shift from centralized planning to indicative planning. Thus, the Committee shifted its onus from ownership to efficiency and competitiveness while ensuring the integrity and operational autonomy of the banks. Financial sector reforms started on basis of Narsimham Committee recommendations aim at fostering financially strong banking companies to be cooperative in a competitive world.

As a result of these financial sector developments, policy makers and social thinkers were apprehensive that cooperative banking sector will be facing the challenges of increasing competition, emerging opportunities and withdrawal of government support and may have to abandon its social objectives. But cooperative banking system has some inherent strength in the form of its sound infrastructure and intimate relations with its customers, these banks have made a vital contribution to nation’s development. Cooperative banking system has progressively matured and is preparing itself to successfully meet new challenges. The Indian cooperative banks have a unique position in the rural credit delivery system of India. This sector of banking industry plays a crucial role in the dispensation of credit for agriculture and rural development. Over the years, they have remained the prime institutional agencies with their vast network, wide coverage and outreach extending to remotest part of the country.

Challenges before the cooperative banks are two folds, on the one hand they are supposed to provide cheap and timely credit to rural masses and on the other hand they have to ensure their profitability and viability in turbulent interest regime. Financial sector reforms, globalization of financial services and technology revolution have strengthened the commercial banking system to a great extent and have improved their internal working systems. All these changes have resulted in improved productivity and profitability of the commercial banking system which enabled them to offer low cost services to customers. But all these changes have created problems for cooperative banking system. Due to its inbuilt weaknesses, structural loopholes and dependence upon agrarian loans, cooperative banks were not able to sustain their profitability. To be able to create a balance between their social objectives and economic compulsions, these banks were needed to change working strategy. So as a result, cooperative banks have diversified their areas of operation. Business diversification process in cooperative banks started in the year 1992. More than 15 years have passed but its impact on working of cooperative banks has not been studied yet. No major study has been conducted to assess the impact and/or performance of this cooperative credit structure under the ages of new economic policy regime. REVIEW OF LITERATURE

“Overdue is planted when the loan is granted.” Admitting to this opinion, it is emphatically stated that the NPAs of the banks should be within allowable limits, and if it exceeds this limit, the entire loaning structure gets diluted. The NPAs freeze the financial institution’s liquidity, cripple the operations and reduce the flow of credit.

Reddy (1993) in his empirical study observed that there had been a growth in the magnitude of overdues of cooperative banks in Andhra along with the phenomenal growth in the flow of the rural credit. Among the reasons identified by him for the alarming position of over dues were ineffective credit appraisal , lack of adequate arrangements for supply of farm inputs, absence of climate for recovery, failure of crops due to natural calamities and adverse agro climatic conditions, the present democratic role, directly or indirectly is a major responsible factor. Favouritisms and red tapism in sanctioning loans and in recovery of loans have resulted in deferring the legal proceedings against the defaulters, which led to mounting overdues.

Thinalaya (1994)in his article observed that mounting overdues is one of the major problems faced by the banks today. While it is more pronounced in the case of rural credit, it is subtle in the case of other advances where the amount involved is very huge. The delinquency ratio is on the increase, which was more often due to unwillingness to repay rather than on account of inability to repay. In his article he observed that industrial sickness was a major problem which was causing great concern to the bankers as advances made to sick industries were stuck up.

Balishter et al (1994) conducted a study to analyze the repayment performance of 175 defaulters from 3 development blocks of Agra District. He found that the large and medium farmers accounted for 37 percent of total defaulters and over 57 percent of total overdues, while the marginal and small farmers accounted for 63 percent of total defaulters and 43 percent of total overdues i.e., better class of farmers were responsible for large proportion of overdues. The amount of overdues and its percent to demand also showed a rising trend during the period of study. It further highlighted that out of 175 defaulters, 38 percent were willful defaulters and remaining 62 percent were non willful defaulters.His study emphasized the need for proper supervision over end use of credit and personal reminders to borrowers on the need to repay the loan as effective devices for checking the excessive overdues.

Soni (1995) in his book, “Leading Issues in Agricultural Economics” analyzed , that despite the fact ,that cooperative credit had increased its share in the rural finance, the expansion of the cooperative credit suffered from various drawbacks, and the most important drawback in the cooperative credit was the existence of high level of overdues. He pointed out that the overdues for both the primary agricultural cooperative societies and the central banks constituted about 40 percent of the loans advanced by them. Obviously, the high level of overdues hindered the process of re-cycling of credit.

Reddy, Ramachandra and Reddy Ramakrishna (1995) made an empirical study selecting 144 defaulters and 72 non defaulters to analyze the causes of default and concluded that the causes which were internal to the credit institutions were inadequate supervision over credit, adverse weather conditions (particularly to droughts or floods),lack of forward and backward linkages, unsound lending policies and unsatisfactory management of the credit institutions.

Hunderka (1995) in his study regarding productivity aspects in RRBs, suggested that (a) profit planning and cost control measures should be improved (b) labour productivity improvement measures to be taken (c) customer services by product development and diversification strategies to be promoted (d) market development strategies for mobilizing more savings to be initiated (e) management audit for controlling other administrative costs to be done (f) the recovery process to be streamlined (g) the funds of bank should be effectively managed.

Reddy et, al (1996)conducted a study, using the multi stage sampling technique and various statistical techniques like t-test, coefficient of variation, f-test and ANOVA, to examine the reasons of default in case of 72 defaulters and 36 non-defaulters. They found that in case of non-willful defaulters, the variables like proportion of cash crops to total cropped area, family consumption expenditure, gross income from agriculture, initial amount of land borrowed and total members showed positive signs for regression co-efficient i.e. had direct influence on overdues. In case of willful defaulters, four variables i.e. land holding, political interference, education and proportion of dependant members to total members showed positive relationship to overdues.

Kanda (1996) critically evaluated the agricultural credit system, pointing out that inadequate control over flow mechanism and poor end use monitoring have not only left some fundamental concerns unaddressed but also sometimes had the unfortunate effect of exacerbating precisely those pernicious evils, which the policies aimed to eradicate. The Cooperative Credit Delivery System is susceptible to certain systemic deficiencies, which cause serious distortions like- Leakages in passage between source and end use, poor management support etc, consequently leading to mounting overdues.Hesuggested that it was necessary that at the level of Department of Agriculture, Department of Rural Area Development, RBI and NABARD; efforts should be made to tighten the agro credit delivery system and to circumscribe its dispensation to subsume the imperatives like adequacy, timeliness, management, linkages, clustering of credit to improve the recovery performance for reducing the alarmingly excessive overdues.

Murthy and Saraswathi (1996) undertook a study to evaluate the quantitative progress made in respect of supply of institutional credit. Using the secondary data made available by RBI in statistical statements relating to cooperative movement in India for a period of 6 years from 1978 to 1983 and assessing the loaning policies of Girijan Cooperative Corporation, Visakhapatnam, the study concluded that the progress in respect of supply of credit was phenomenal over the period of study but this progress pales into significance, if the magnitude of overdues is considered. The study suggested that making cooperatives as exclusive institutions of weaker sections i.e. making them homogeneous would not result in decline in overdues, as mere homogeneity was not a sufficient condition.

Sivaprakasam (1996) undertook a study, based on the analysis of a sample consisting of 160 defaulters, to analyze the socio-economic characteristics and the attitude of defaulters towards repayment of dues. He emphasized that the concessions like write off loans to members by the government were responsible for the increase in the number of defaulters because many farmers became members with an ulterior motive of getting concessions from the government.Regarding the socio-economic and political characteristics like age, sex, religion, community, education and size of landholding, the study concluded that these had a direct bearing on the repayment of dues and determined the attitude of the defaulters to repay their dues.

Veerashekharappa (1996) in his study of rural credit in two VIP districts (represented by two former prime ministers) namely, Sultanpur and Raebareli of Uttar Pradesh attempted to examine the influence of political intervention on the expansion and delivery of institutional credit during the period 1984-85 to 1988-89. There was a growth of disbursements of about 19 per cent in these districts and the bulk of the lending went to the priority sector consisting of rural poor because of the launching of several anti-poverty schemes in these districts. However, the position regarding recovery of over dues of all rural financial institutions in these districts was quite dismal. The percentage recovery of total demand of all credit agencies varied from 52.10 percent for Sultanpur and 52.29 percent to 59.04 percent for Raebareli during the period of study. The recovery position in Raebareli was a little better because of declining VIP status of this district as it ceased to be Prime Minister’s constituency after October 1984