G N Bajpai: A handhold for co-operative banking

Co-operative banking has served its customers significantly through reach and relationships.

The century-old co-operative banking in India, with a fairly wide network, has given access to banking to a sizeable section of the rural and urban poor. There are over 106,919 rural co-operative credit institutions with short-term and long-term structures. The short-term structures comprise 31 state co-operative banks, 365 central co-operative banks, and 105,735 primary agricultural credit societies. There are about 1,872 urban co-operative banks (UCBs) with 6,990 branches, and deposits and advances totalling Rs 104,482 crore and Rs 68,005 crore, respectively. Over 85 per cent of the UCBs and their branches are located in Maharashtra, Gujarat, Karnataka, Tamil Nadu, and Andhra Pradesh. But the entire co-operative banking segment, in particular its urban component, seems to be ailing.

Notwithstanding the chequered history, the institution of co-operative banking has served its customers significantly. The unique selling proposition has been relationship banking. The managers of these institutions know their customers very well""their potential and aspirations. It would not be preposterous to suggest that the same relationships, more often than not culminating into vested interests, bypassed the growth of professionalism in the management of businesses, which eventually led to losses, leakages and even the vandalising of resources.

In each large-scale scam in the financial market, co-operative banks are found to be involved. Even after five years, the ghost of the Madhavpura Mercantile Cooperative Bank, Ahmedabad, continues to haunt more than 210 UCBs, which had parked about Rs 200 crore. The depth of mismanagement can be gauged from the money that the Deposit Insurance and Credit Corporation (DICGC) has been shelling out. In the last two years, it has been estimated that over Rs 650 crore have been paid by the DICGC and all the outflows have been to co-operative banks' customers. Over 300 co-operative banks have been liquidated in the recent past, and another 228 will have to call it a day soon. The issue of fresh licences has been under suspension for two years. The misery of customers, and the common man as a consequence, has drawn the attention of regulators and legislatures alike.

The wide-ranging initiatives introduced by the Reserve Bank of India (RBI), the deemed regulator, and also by the state governments, providers of administrative direction, to bring order in the functioning of these institutions have met with stiff resistance from various interest groups. The government of Maharashtra (the state accounts for over 60 per cent of the UCB network, advances and deposits) is still pondering over signing an MoU with the RBI. UCBs, excepting a few spots of comfort (only 43 per cent are in the pink of the health), have been in disarray and begging for co-ordinated efforts to revitalise a powerful institution.

In fact, co-operative banking is today faced with key challenges emanating from the competition thrown up by commercial banks and regulatory diktat. Commercial banks have expanded their network and provided a variety of services, leading to anytime money, anywhere banking, and any financial intermediation. They have aggressively entered the co-operative banks' area of core competence""relationship banking. Rightly, the regulator is insisting on capital adequacy, exposure norms, control over non-performing assets (NPA), efficient risk management, disclosures, and sound co-operative governance.

On the positive side, the high GDP growth rate (averaging 8 per cent in the last three years) is reducing the delinquency ratio, increasing economic prosperity, and accelerating the rise of disposal incomes. The new ethos offers ample opportunities for the banking system to profit by providing quality and comprehensive intermediation services. Gross domestic savings in India have risen to 29.1 per cent of GDP and a very sizable amount is pooled in by clientele who have been hitherto served by co-operative banking. The time is ripe for co-operative banking to thrive but the environment is also challenging. A strategic approach would prepare these institutions to meet the regulatory challenges, beat the competitors, and reap the opportunities.

The challenges can be addressed by mobilising additional capital, harnessing technology, and building skills and professionalism. The sizes of individual units (co-operative banks) hinder them from being able to organise any of the three critical inputs. Technology is expensive and the obsolescence rate is very quick. Economics commandeers scale. Skill-building is a prolonged process, market hiring unaffordable, and staff turnover rampant. Spreading skills cost also warrants scale. Even though a huge amount of capital is floating around in the market place, seeking investment opportunities and leading to an asset price bubble, fresh risk capital (particularly in the light of the inglorious past) is not easily forthcoming except from vested interests, who have the incentive to prevent the reform and modernisation processes.

The remedy lies in outsourcing technology and skills, which can also help professionalise organisations, transform them into modern financial institutions, build profitable models, and thus enable sustainable business growth. A question may arise: If core business activities have to be outsourced, what is the great merit in keeping these institutions alive? Elementary, my dear Watson! The UCBs' core competence is reach and relationships. Bharti Tele-Ventures has outsourced core technology (mobile telephony) maintenance and upgradation. Sunil Mittal explained to me that the management's competence is in marketing, and therefore the company has concentrated on that to optimise profitability.

Organisations can be shaped to own, maintain, and provide technology to co-operative banks at a fee. And they keep the technology modern, efficacious, and cost-efficient. Similarly, bright finance professionals can build organisations providing core banking skills and market their services to co-operative banks at an affordable price. Even the current network of co-operative banks offers adequate market size to develop such an outsourcing business space. These suggestions will encounter two serious challenges: (a) convincing interest groups, and (b) managing the transition. An incisive approach to dealing with the issues can remedy the situation. The RBI and state governments have to encourage and even incentivise the outsourcing model. UCBs inter alia need skills and technology and hand-holding to infuse confidence.

Co-operative banking as an institution is still relevant and can play a very useful role in meeting the objective of "greater degree of financial inclusion in the country", as pronounced by RBI Governor YV Reddy in the Annual Policy Statement 2005-06, and the welfare of the aam admi, as vocalised by the Prime Minister and his men.

(The author is former chairman, Sebi & LIC)