The scheme is designed to improve the health of cooperative banks in the wake of the proposed commissioning of the National Cooperative Bank of India. The scheme is slated to be implemented in a phased manner. Cooperative banks in select states would be taken up first where the flow of credit is choked.

The scheme was initially prepared by the committee of secretaries and fine-tuned by an expert group set up by the ministry. It was further modified by the National Bank for Agriculture and Rural Development (Nabard).

The package of measures include certain commitments to be made by the concerned state government and the cooperative banks regarding rectification of imbalances, excess of bad anddoubtful debts over reserves provided thereof, introduction of voluntary retirement scheme aiming at downsizing staff, introduction of a deposit guarantee scheme and computerisation and modernisation of cooperative banks.

The agricultural ministry noted the Union government as shareholder of public sector commercial banks (CBs) and both the union government and state governments as joint shareholders of regional rural banks (RRBs) have already taken steps to recapitalise the CBs and RRBs to enable them to regain a fresh lease of life. The CBs could improve their recovery from 54.2 per cent in 1992 to 61.9 per cent in 1996. Therefore, in the era of competition, the cooperative banks should also be given an opportunity for recapitalisation.

This is significant, in context, that of the total of Rs 21,300 crore institutional agricultural credit disbursed through the multi-agency approach of commercial banks, RRBs and the cooperatives in 1994-95, the cooperatives alone accounted for 62 per cent.

Thereafterwith the deterioration of health of cooperative banks, the credit disbursement to agriculture by this sector got affected. The priority sector lending by commercial banks also showed a disturbing trend and declined to around 15 per cent as against the requisite 18 per cent. The access to formal credit was not very extensive with about 25 per cent of rural household getting short-term crop finance and only 3 per cent availing long-term credit annually.

The remittances of shortfalls in priority sector lending by commercial banks to Rural Infrastructure Development Fund (RIDF) has resulted in diversion of credit meant for agricultural production and limited investment.

The health of the cooperative banks was deteriorated due to the externally imposed loan waiver policy under the Agricultural Rural Debt Relief (ARDR) scheme and insistence upon the adherence to the prudential norms (including conditions relating to capital adequacy, asset classification, income recognition and provisioning for bad debts)prescribed by the Narsimhan Committee. Besides limited ability to mobilise resources, low levels of recovery, high transaction costs, frequent suspension of recovery and administered interest rates and externally imposed controls have further aggravated the problem.

The cooperative banks, being placed in such a situation, are finding extremely difficult to compete with commercial banks and RRBs. Besides new competitors like local area banks set up with Rs 5 crore authorised capital and Rs 2 crore subscribed capital and the agricultural development finance corporations set up in some states with assistance from Nabard and the Union government are eroding the profitability of cooperative banks.