THEORY, LAW AND PRACTICE OF

CO-OPERATIVE BANKING
(With Case Studies)

Dedicated to
Appa Late K.M. BATCHA

AUTHORS

K.A. Abdul Kuddus, DRS., M.Coop.,M.A(Eco.).,

Ex. Associate Professor,
Vaikunth Mehta National Institute of Cooperative Management,
Pune.

A.K. Zakir Hussain, M.Com., M.Phil., ICWAI (Inter)., DBIM, MBA., CTFC., Ph.D.,
Senior Faculty Member, Institute of Cooperative Management,
Kannur, Kerala.

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® No part of this book shall be reproduced, reprinted or translated for any purpose
whatsoever without prior permission of the publisher in writing.

First Edition : 2007

Second Revised Edition : 2010
Third Thoroughly Revised Edition : 2014
Fourth Thoroughly Revised Edition : 2017
Price : Rs.450/-

Published by :

LIMRA PUBLICATIONS
No.16, Valluvar Salai,
Jagannathan Nagar,
Arumbakkam,
Chennai - 600 106.
Cell : 9941804683 / 09526979950

Printed at :
Durga Graphic
Chennai - 600 094.
Phone : 72999 75313

ii
 PREFACE

According to Ministry of Agriculture, GOI, Agriculture provides

employment and means of livelihood to around 60% of population. Since
most of the farmers are small/marginal farmers and agriculture labourers,
the credit has become an important input for their development. In order to
remedy the rural indebtedness and to save the farmers from the clutches of
moneylenders, Cooperative Credit Societies were organized since 1904.
Cooperative credit consisting of Short-term, Medium-term and Long-term
Credit structures came into existence after passing of the Second All India
Cooperative Societies Act, 1912. There have been a lot of developments in
both credit and banking sectors of this movement. Various Committees
appointed by both Government of India and the RBI like All India Rural
Credit Survey Committee, Review Committee, Khusro Committee, Prakash
Bakshi Committee and HPC on UCB brought out important recommendations
which were implemented in ST, LT and Urban Credit Structures in many
States.

The response to the first 3 editions of the book from the students,
academia and bankers has been very heartening and inspiring. This has
made us to come out with once again a thoroughly updated edition.

Chapters contained in the subject 'Environment for Cooperatives' like

Economic organizations, cooperative principles, genesis and workings of
PACS, DCCBs, SCBs, SCARDBs, PCARDBs, UCBs, Employees Coops.,
Industrial cooperative banks and national federations are dealt in this book
more systematically.

Chapters dealing with legal aspects concerning banking like BR Act,

RBI Act, NABARD Act, and PML Act, are updated with the latest

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amendments. Recent court verdicts on the SARFAESI Act, and Consumer
Protection Act Bill 2015, Depositors' Protection Bill 2016, Income tax Act
(FY 2017-18), etc. brought in this book would be much relevant for the
trainers and bankers. Newer chapters like banking products and services,
ALM, RTI Act and banking technology including digital banking are included
in this 4th edition.

We wish to thank Shri.Jatindranath Swain, I.A.S., the former Registrar

of Co-op Societies, Tamilnadu for having released the first edition of this
book of 2007 and given a Foreword for the second revised edition of 2010.
We express our gratitude to the former Registrar of Co-op. Societies,
Tamilnadu Shri.P.Seetharaman, I.A.S., for having given his valuable Foreword
for the 3rd thoroughly revised Edition.

We wish to express thanks to all our family members who have given
their support and cooperation for the completion of the book. We sincerely
feel that this book will be immensely useful to the students of cooperation
(both UG and PG), trainees of cooperative management institutions, research
scholars and other official and non-official Cooperators. We most earnestly
solicit valuable suggestions from worthy readers, with a view to bring about
further improvement in the next edition of the book.

Prof. K.A. Abdul Kuddus Dr.A.K.Zakir Hussain

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 CONTENTS
Chapter CONTENTS Page No.
1 Economic Organizations: Capitalism, Socialism, Mixed economy,
Cooperation-The Middle Way
2 Definition and Evolution of Cooperative Principles: ICA, Principles of
Cooperation, Values, IYC, International Coop. Day, Coop. Flag.
3 Genesis and Growth of Cooperative Credit and Banking: Classification
of Credit, Need for Institutional Credit, Genesis of Coop. Credit and
Banking, Structure of Banking in India, Commercial banks vs. Coop.
banks, RRBs, Local Area Banks, Types of Coop. Banks, Features of
Coop. Banks, Functions of Commercial Banks, Progress of Institutional
credit, Integration of Credit Structure, Coop. Credit Structure
4 Primary Agriculture Credit Societies: Evolution and growth, Coop.
Rural Banks, Large sized societies, LAMPS, TRIFED, Service
Cooperatives, Farmers Service Coop. Societies, PACS: Objectives,
Functions, Membership, Management, Sources of funds, Loans,
Overdues, Crop Loan System, Consumption Credit, Non Credit
Activities, Problems and Suggestions
5 Developments in Agricultural Credit: Service Area Approach, Business
Development Plan, Development Action Plan, Breakeven level of
business, Kisan Credit Card
6 District Central Cooperative Banks: Progress, Types, Area,
Membership, Objectives, Structure, Management, Staff, Resources,
Loans and Advances, Technical Committee, Interest Subvention,
Financing of Weavers Coops., Employees Coops., Marketing Coops.,
Consumer Coops., SHGs, Sugar Mills and Spinning Mills, Branch
Banking, ICDP, Overdues, Non-overdue Cover, NPA, Settlement
Schemes, CRAR, Licensing, Inspection, Supervision, Audit, Problems
and Recommendations.
7 State Cooperative Banks: Need, Structure, Objectives, Membership,
Management, Resources, Seasonal Agricultural Operations, Loans and
Advances, Rephasement and Rescheduling of Loans, Minimum
involvement, Agricultural Debt Waiver and Debt Relief, NPA, Working
Results, Training, State Drafts Scheme, Compliance of BR Act,
Affiliates Development Programme, Problems and Recommendations.
8 National Federation of State Cooperative Banks: Objectives,
Membership, Management, AIMAS, Banking Codes and Standards
Board of India

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9 Cooperative Agriculture and Rural Development Banks: a)PCARDBs:
Objectives, Membership, Management, Sources of Funds, Loans and
Advances, Procedure for issue of LT finance, NPAs
b)SCARDBs: Functions, Membership, Management, Resources,
Ordinary Debentures, Rural Debentures, Special Development
Debentures, Sinking Fund, Loans and Advances, Technical Cell, Scale
of Finance, Overdues and NPA, Causes of Overdues, Recovery, One
Time Settlement Scheme, Training, Problems and Suggestions
10 National Cooperative Agriculture and Rural Development Banks’ Federation:
Membership, Management, Publications, Performance Awards
11 Cooperative Bank of India: Objectives, Membership, Funds, Management

12 National Bank for Agriculture and Rural Development: Genesis, Objects,

Functions, Membership, Management, Refinance, Direct Lending, Credit
Authorization Scheme, PACS Development Cell, Swarozgar Credit Card
Scheme, Potential Linked Credit Plan, Knowledge Center, Self Help
Groups, SHG- Bank Linkage Programme, Joint Liability Groups,
Farmers’ Clubs, Cooperative Development Fund, Rural Innovation Fund,
SOFTCOB, GIZ-NABARD Rural Financial Institutions Programme,
Centre for Professional Excellence in Co-operatives, Inspection and
Supervision, NABARD Chair Unit Scheme, Training & Consultancy
13 Urban Cooperative Banks: Genesis, Area of Operation, Objects,
Structure, Dual Control, Membership and Management, Funds,
Investments, Loans and Advances, Loans to SMEs, Credit Guarantee
Scheme, Gross NPV vs. Net NPA, Cooperative Court, Scheduled UCB,
Maintenance of CRR, SLR and CRAR, Unit vs. Branch Banking, Branch
Licensing, Currency Chest, Insurance Business, Welfare Schemes,
Mahila Banks, Inspection and Supervision, Internal Control System
and Audit, Rating Model, Training, Conversion of Primary Credit
Societies in to UCBs, Problems and Suggestions of UCBs
14 Employees’ Cooperative Bank: Need, Types, Area of Operation,
Membership, Objectives, Management, Resources, Loans, Recovery,
Maintenance of CRR/SLR, Welfare Schemes, Problems and Suggestions
15 National Federation of Urban Cooperative Banks and Credit Societies:
Vision, Membership, Management, Publication, Training, Achievements
16 Industrial Cooperative Bank: Origin, Importance

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17 Non Performing Asset and Recovery Management: Norms for NPA, Out
of order account, Income Recognition, Asset Classification, Provisioning,
Capital Adequacy, Causes of Overdue, Suggestion for Recovery, Defects
of Coercive Method, Follow up, Recovery Ethics
18 SARFAESI ACT AND Debt Recovery Tribunal:
a)SARFAESI Act: Applicability, Procedure, Exemption, Benefits and
Problems, Central Electronic Registry, Recent court verdicts
b) DRT: Right to prefer application, Right for Compensation, RDDB Act
19 Role of RBI and SBI in the Development of Cooperatives:
a)RBI: Issue of Notes, Controller of Credit, Agricultural Credit,
Agricultural Credit Department, Urban Banks Department, Regulatory,
Supervisory and Developmental Functions, Provision of Finance, Various
Committees, Training
b)SBI: Village Adoption, Lead Bank Scheme, Financing Cooperatives
20 Important Committees and Commissions on Cooperative Credit and
Banking: All India Rural Credit Survey Committee, Committee on Coop.
Credit, Mirdha Committee, All India Rural Credit Review Committee,
Santhanam Committee, Banking Commission Report, Report of the
Committee on Coop. Land Development Banks, Study Team on Overdues,
Datey Committee, Report of the Committee on Integration of Coop. Credit
Institutions, Report on National Commission on Agriculture,
CRAFICARD, Agriculture Credit Review Committee, Narasimham
Committee, Jagadish Capoor Committee, Expert Committee on Rural
Credit, Task Force on the Revival of Coop. Credit Institutions, Task
Force on the Revival of LTCCS, Expert Committee, Madhava Das
Committee, Committee on Licensing of New UCBs, Working Group to
Review the Systems of UCBs, High Power Committee on Urban Banks,
Anant Geete Committee, Joint Parliament Committee, Committee on
Financial Sector Assessment, Malegam committee, High Powered
Committee on UCBs
21 Banking Regulation Act: Objectives, Definitions, Application of the Act,
Use of word Bank, Prohibition of Trading, Disposal of Non-banking
Assets, Requirement of Minimum Capital and Reserves, Maintenance of
CRR and SLR, CRR Vs. SLR, Restrictions on Loans, RBI’s power to
control Advances, Licensing, Opening of New Places of Business, Return
of Unclaimed Deposits, Monthly Returns, Accounts and Balance Sheet,
Audit, Submission of Return and Publication, Inspection, Nominations,
Penalties

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22 RBI Act: Scheduled Bank, Making of loans and advances, Validity of
loan or advance not to be questioned, Maintenance of CRR by Scheduled
banks, Inclusion in the Second Schedule Exclusion of bank from Second
Schedule
23 NABARD Act: Definitions, Applicability, Objectives of Supervision, On-
Site Inspection, Supplementary Appraisal, Off-Site Surveillance and
Monitoring, Credit Monitoring Arrangements, Board of Supervision
24 Customer Service: Tips for customers delight, Customer's expectations
from banks, Customer Service over phone, Guidelines on Customer
Service, Customer Retention Management, Customer Service using
Technology, Goiperia Committee
25 Prevention of Money Laundering Act and KYC Norms:
a) PML Act: Objects, Applicability, Cash Transaction Report, Suspicious
Transaction Report, Forged Notes Report
b)KYC Norms: Applicability, Customer Acceptance Policy, Customer
Identification Procedures, Monitoring of Transactions, Risk
Management, Principal Officer, Precautions to be taken in opening of
account, Customer Identification Procedure in cases of Individuals,
Firms, Companies and Trust, OVD, small accounts, Consequences for
non compliance
26 Financial Inclusion: Extent of Exclusion, Reasons for Exclusion,
Reasons for not borrowing from banks, Committee on Financial
Inclusion, No Frill accounts, Jan-Dhan Accounts, Business Facilitators
and Business Correspondents Models, Financial Inclusion Fund,
Biometric ATMs, Financial Literacy Centres, Easing KYC Norms,
Priority Sector Lending Certificates, General Credit Card, Passive
Banking, Committee on Financial Sector Reforms, Committee on
Medium-term Path on Financial Inclusion, Financial Inclusion and Role
of Cooperatives, Progress in Financial Inclusion
27 Consumer Protection Act: Protection to Consumers, Areas constituting
Complaints, Consumer Dispute, Defect, Deficiency, Unfair Trade
Practice, Jurisdiction, Who can file a complaint? Procedure, Time Limit,
Consumer Court, Penalty, Bank Cases, Highlights of Consumer
Protection Bill, 2015
28 Banking Ombudsman: Role, Scope, Complaints entertained, Procedure

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29 Income Tax Applicable to Cooperative Credit and Banking Institutions:
Income tax applicable to PACS, Recent Court Verdict on Section 80P,
Income Tax applicable to Employees Cooperatives and Urban Credit
Cooperatives, Income tax applicable to Cooperative Banks, Extension of
scope of section 43D, Income tax applicable to PCARDBs & SCARDBs,
Tax Rate, TDS on Interest, Declaration u/s 15G and 15H, TDS
certificate, TDS Returns, TAN, Disallowance for not deducting tax
30 97th Constitutional Amendment on Cooperatives: Right to form
Cooperative Societies, Addition into New Directive Principle of State
Policy, New Chapter Part IXB, Recent Court Verdicts

31 RTI Act applicable to Coops.: What is Information & Right to

Information?, Applicability, Seeking Information under Cooperative
Societies Act, Delhi High Court Verdict, 2016
32 Banking Products and Services: Current Account, Savings Deposits,
Recurring Deposit, Fixed Deposits, Deposit Schemes for NRIs, Joint
Accounts, Minor Account, Demat Account, Secured loan and Unsecured
loans, Open-ended loans and Closed-ended loans, Fund based lending
and Non fund based lending, Term Loans versus Demand Loans,
Working Capital Finance versus Project Finance, Loans Vs. Advances,
Types of Loans and Advances, Home Loan, Mortgage Loan, Vehicle
loan, Gold loan, Small Business Loans, Loans against Accounts
Receivable, Rental Deposit Loan, Loan against Credit Invoices, Lease
Rent Discounting, Line of Credit, Cash Credit Vs. Overdraft, Quality of
Lending and Credit Risk, Pre-requisites for a good quality lending,
Scrutiny of credit proposal, Essentials of a good proposal, Skills of the
Appraiser, Projections, Collaterals and Margins, Credit Rating,
Exposure Norms, Demand and Supply Gap, Market Research, Scrutiny,
Disbursement, Follow-up, Loan Syndication, Online Loan Services,
Agency Service, Foreign Exchange, Securities, General Utility Services,
Locker Facility, Traveller’s Cheques, Letter of Credit, Banker-Customer
Relationship, Rights of a Banker, Obligations of a banker
33 Asset Liability Management and Risk Management: Why ALM? Pillars
of ALM, ALM Implementation Procedure, ALM in Coop. Banks,
Liquidity Risk, Interest Rate Risk, GAP Analysis

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34 Modern Banking: Customer Retention Management, Corporate
Governance, Productivity Improvement, Discouraging ‘Brick and
Mortar type’ banking, Banc Assurance, Universal Banking, Small
Finance Banks Vs. Payment banks, Retail vs. Wholesale Banking,
Marketing of Banking Services, Cross Selling, Outsourcing, Mergers
and Acquisitions, Islamic Banking, Deposit Insurance Credit Guarantee
Corporation: Eligible Institutions, Deposits and Coverage, Frauds in
Banks: Types, Phishing, Vishing, Smishing, Skimming, Carding, Fraud
Control Mechanism, Basel I, Basel II, Basel III, Guidelines on
implementation of Basel III Capital Regulations in India, Recent
judgement on Accepting Public Deposit, Supreme Court Interim
Direction, Central Registrar Notification
35 Banking Technology Management: Committees on Banking Technology,
Core Banking Solution, ATMs, Onsite ATMs vs. Offsite ATMs, National
Financial Switch, White label ATM vs. Brown label ATM, Micro ATM,
Shared Payment Network System, Use of ATMs as a sub-member,
Credit Cards, Debit Cards, RuPay Cards, Contactless Cards, Gift Cards,
PoS Machine, Cheque Truncation System, E-Cheque, Electronic Funds
Transfer: NEFT, RTGS, Electronic Clearing System, Corporate Banking
Terminal, Electronic Data Interchange, Tele-banking, Internet
Banking, Mobile Banking, E-Wallet, Unified Payment Interface, USSD
based Mobile Banking, BHIM App, Aadhaar Enabled Payment System,
Aadhar Payment Bridge and EBT, Crowd funding, Marketing on Social
Media, Green Banking, Digital Banking, Ratan Watal Committee for
Digital Payments (2016), National Payment Corporation of India,
Milestone of Payment Systems in India

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 CASE STUDIES
SI. Chapter Page
No. Topic
No. No.
Ernakulam District Cooperative Bank Ltd.,
1. 6
Kerala
Tamilnadu State Apex Cooperative Bank Ltd.,
2. 7
Tamilnadu
Kerala State Cooperative Agricultural & Rural
3. 9
Development Bank Ltd., Kerala
Bhagini Nivedita Sahakari Bank Ltd.,
4. 13
Maharashtra

5. 13 Saraswat Cooperative Bank Ltd., Maharashtra

Tamilnadu Industrial Cooperative Bank Ltd.,

6. 16
Tamilnadu

ANNEXURES
Annexure Page
Contents
No. No.
Statement Showing All India Position of PACS Including
I
FSS & LAMPS from 1998-99 to 2014-15
Central Cooperative Banks at a Glance from 1998-99 to
II
2014-15
State Cooperative Banks at a Glance from 1998-99 to
III
2014-15

IV Performance of PCARDBs from 1998-99 to 2014-15

V Performance of SCARDBs from 1998-99 to 2015-16

VI Performance of UCBs from 2002-03 to 2015-16

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 CHARTS
SI. Chart Page
Topic
No. No. No.

1 3.1 Structure of Institutional and Private Credit

2 3.2 Functions of Bank

3 3.3 Cooperative Credit Structure

4 6.1 Administration Setup of DCCBs

5 12.1 Organizational Setup of NABARD

TABLES
SI. Table
Contents Page No.
No. No.
1 3.1 Progress of SBI
2 3.2 Flow of Institutional Credit to Agriculture
3 5.1 Details of KCC Issued
4 6.1 Scale of Finance of DCCBs
5 6.2 Working Results of DCCBs
6 6.3 Progress of EDC Bank
7 7.1 Non-Performing Assets of SCBs
8 7.2 Profitability Position of SCBs
9 7.3 Performance of TNSC Bank
10 9.1 NPAs of PCARDBs
11 9.2 Scale of Finance & Periodicity of Major Sectors
12 9.3 NPA Position of SCARDBs
13 9.4 Details of Loans Disbursed
14 9.5 Performance of KSCARD Bank
15 12.1 Rate of Interest on Refinance
(w e f 31 January 2017)
16 13.1 Performance of Saraswat Cooperative Bank
17 16.1 Performance of TAICO Bank
18 20.1 Pattern of Supply of Private Credit
19 20.2 Position of UCBs
20 20.3 CRAR Standards for UCBs

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