The committee was headed by former RBI executive director UK Sarma.It set a timeframe of five years for cooperative banks and three years for regional rural banks to achieve the eight per cent capital adequacy ratio. Other recommendations include abolition of credit authorisation scheme, setting up of state-level committees to monitor the progress of audit of cooperative banks and primary credit societies.

Sarma, who submitted a 54-page report to Nabard chairman P Kotaiah on Monday, said that the capital adequacy norm, which has been made applicable for commercial banks earlier, should be applicable to cooperative banks and RRBs to"elevate them to a sounder plane of functioning".According to the report, the copy of which was available with The Financial Express, if the deteriorating financial viability of the cooperative banking structure was to be stemmed and the cooperative banking structure -- as a crucial financial intermediary for rural finance -- has to play a vibrant role in the emerging competitive environment, capital adequacy norms should be extended to cooperative banks and RRBs in a gradual manner.

The committee has taken note of the centre's announcement that Rs 6,600 crore would be pumped in to cleanse the balance sheets of cooperative banks. It has strongly emphasised recapitalisation of cooperative banks and RRBs to enable them to reach the four per cent capital adequacy level by March 31, 1999, after cleansing balance sheets.

Such assistance could be by way of share capital contribution by the state government, wherever the limit of 49 per cent was reached or by way of recapitalisation reserve or fund, to berepatriated over a period time, it said. The committee pointed out that the centre has provided Rs 16,384 crore to commercial banks to cleanse their balance sheets and achieve capital adequacy norms. The centre, state governments and sponsor banks have collectively provided Rs 1,547 crore to 153 RRBs for the same purpose.

The committee has recommended that periodical on-site examination by Nabard should be supplemented by additional instruments of supervision including on-site review procedures. It has suggested refocussing of the on-site inspection strategy to an evaluation of the critical aspects of the macro-level functioning of these banks on the "CAMELS" model, leaving various mirco-level evaluations to subsidiary vehicles.

The off-site surveillance statements may be revised to obtain data on proforma balance-sheet, profit and loss account, position of net performing assets and compliance with capital adequacy, it said. The committee has emphasised a time-bound programme for entrusting the functionof annual statutory audit to professional auditors may be drawn by Nabard in consultation with the state governments and taken up for implementation.

A state-level cooperative audit committee headed by the secretary, cooperation, as chairman be constituted to monitor the progress of audit of cooperative banks and primary credit societies, it said.Referring to incidence of frauds, the report noted that as many as 16 of the 28 state cooperative banks reported frauds involving Rs 13.3 crore while 258 of the 364 district central cooperative banks reported frauds involving Rs 306.3 crore. The RRBs reported frauds of Rs 12.04 crore in 155 banks.

The recovery of amounts involved in frauds was a mere 8 per cent and 6 per cent of the amounts involved in the state cooperative banks and district central cooperative banks respectively and the position was more or less the same in the RRBs. The position of primary agricultural credit societies dispensing rural credit at grass-roots level was much worse as nearly 60per cent of them were reported to be "non functional or defunct" because of poor recoveries and unviable business levels.