By Deepti George, IFMR Finance Foundation
In July 2012, RBI set up the Expert Committee under the Chairmanship of Dr.Prakash Bakshi, Chairman, NABARD, to examine the Three-Tier Short Term Cooperative Credit Structure (STCCS) in India. The Terms of Reference for the Committee include:
- To assess the role played by State & District Central Cooperative Banks in fulfilling the requirement of agriculture credit, the primary purpose for which they were set up.
- To identify Cooperative Banks that may not be sustainable in the long run even if some of them have met the diluted licensing criteria for the time being.
- To suggest appropriate mechanism for consolidation by way of amalgamation, merger, takeover, liquidation and delayering.
- To suggest pro-active measures that needs to be taken in this direction by the Cooperative Banks themselves, Government of India, State Governments, RBI and NABARD.
Below are some of the important recommendations made by the Committee in its report published on 23rd January 2013.
- The Committee acknowledges that it would be very difficult for all Primary Agricultural Credit Societies (PACS) to attain core-banking systems and ATM switch needed to comply with the new guidelines ruling the provision of agriculture credit (these require the provision of ATM and POS-device enabled Kisan Credit Cards). It has therefore recommended all PACS to be converted into Business correspondents (BC) to their respective Central Cooperative Banks (Current regulations allow for PACS to be BCs to commercial banks and RRBs). PACS are anyway not covered under deposit insurance (DICGC) and therefore depositors at the PACS (not a significant contributor to the loans given by PACS, as 90% of the loans through PACS are funded by the respective CCBs) would become normal shareholding members of the CCB with voting rights for ‘active’ members. What constitutes ‘active’ is to be specified by RBI.
- The Committee stated that STCCS must provide atleast 15% of the agriculture credit requirements in its area of operations and gradually increase it to atleast 30% (as well as have atleast 70% of the loan portfolio for agriculture). If the CCS is unable to achieve the 15% and is consistently underperforming, it must be converted into an Urban-Cooperative Bank (UCB). Similarly, State Cooperative Banks in the North-eastern region, as well as in the smaller States and union territories be converted into UCBs, as either the need for agriculture credit is insignificant in their areas or the customers were already urban to begin with.
- The Committee noted that while the CCBs are placing their deposits with the State Cooperative banks in the form of term deposits in order to meet their SLR and CRR requirements, the State Cooperative banks have lent larger amounts to the same CCBs, which makes these term deposits highly risky. The Committee recommends that measures be put in place to prescribe safe investment norms for these deposits placed by the CCBs in their State Cooperative banks, one way being by prescribing targets for allocation to the food consortium credit.
- The Committee recommends that if a State gets divided, this does not necessarily have to result in a well-functioning State Cooperative Bank getting split between the two new States, and must instead be allowed to continue in the form of a multi-state cooperative bank.
- While an amount of Rs.9002 crore was released by NABARD as Central government’s share, and the state governments have released Rs.856 crore as recapitalisation assistance as part of the Vaidyanathan Committee Reforms, there remains a significant dearth of funds for the same. The Bakshi Committee looked into various strategies for achieving higher CRAR for the CCBs. (the Committee has estimated the additional capital required to be between Rs.4000 cr – Rs. 6500 cr based on the 4 models elucidated in the report). The Committee has arrived at numbers for the additional capital requirements for different categories of CCBs, namely, unlicensed CCBs, unlicensed banks recommended for license in 2012-13, licensed banks with less than 4% CRAR, banks with CRAR between 4%-7%, and banks with CRAR 7% or more. The recommendations to mobilise additional capital are through the following ways:
- Since technically, capital is to be contributed only by members of the cooperative, an analysis was carried out to see the feasibility of mobilising capital on a per borrowing member basis for the CCBs. For a proportion of the CCBs that were required to mobilise upto Rs.25 lakh per PACS, the Committee has concluded that it is feasible to do so by mobilising upto Rs.4000 per borrowing member over a 4 year period. However, for CCBs that need to raise more than Rs.25 lakh per PACS, the report has put forth suggestions such as converting non-borrowing members into borrowing members, and to enrol more members.
- RBI can permit CCBs to issue, and to treat as Tier-1 capital, fixed interest bearing deposits to members (convertible to regular shares after the CCB achieves the CRAR targets), as well as perpetual bonds to individuals and States.
- RBI can permit the treatment of Tier-2 capital as Tier-1 capital to an extent of 150% of Tier-1 capital for a limited period.
- Banks that cannot mobilise capital through any of these strategies would eventually have to opt for consolidation (of 2-4 CCBs in order to achieve sustainable CRAR levels) or closure/ liquidation (such as of small CCBs). The Committee has called for constituting a Working group for each State to look into implementation and legal aspects of such a consolidation exercise. Broad parameters for deciding on consolidation were specified, such as a minimum business level of Rs.200 cr for the consolidated CCB, achieving CRAR targets within specified time limits, as well as giving preference for consolidation of contiguous operational areas.
- Besides changes to the various Acts to put the above recommendations into practice, the Committee has made various recommendations for amendments to the Banking Regulations Act, as well as other Acts, to bestow more powers to the RBI to involve in governance and other internal issues within the CCBs.