Body

Preparation of Development Action Plans (DAPs)

for Cooperative Banks under

ST (SCBs/DCCBs) and LT (SCARDBs/PCARDBs) structure

The DAP/MOU mechanism in Cooperative banks was initiated in 1994-95 mainly with a view to ensuring that the cooperative banks in ST and LT structures (SCBs/DCCBs and SCARDBs/PCARDBs) achieve sound financial health and function as viable units on sustainable basis. The Development Action Plan mechanism basically acts as a diagnostic tool which, in turn, facilitates internal strategic planning exercise in attaining sustainability within a reasonable period of time. The feedback received from various ROs as also some of the banks indicate that the adoption of DAP-MOU mechanism has made a positive impact on the performance of cooperative banks. Many of the banks have made all-round progress in various business parameters and are now sensitised towards and appreciative of the concept of cost effectiveness, strategic business planning, etc. However, the impact of the progress in respect of some other business parameters on the bottom line of the banks is not clearly visible immediately as it has been partly nullified by the provisioning to be made by the banks under the prudential norms.

2. Keeping in view the positive impact as also the need for consolidation of the impact, it has been decided by NABARD to continue the system of preparation of DAP for a 3 year block period. The proposed DAP now will cover a 3 year period from 2000-2001 to 2002-2003. It is just possible that some of the banks on the lapse of the period of the previous DAP may have prepared a fresh DAP for, the 3 year period say from the beginning of 1999-2000. In case of this category of banks it would be necessary to look into the quality of the DAP already prepared and in case the same is satisfactory the fresh DAP for 3 years from 2000-2001 may not be prepared. The guidelines for Base DAP for 2000-2001 to 2002-2003 will be broadly on the lines of NABARD, HO, Circular No.NB.IDD.COOP.3768/ACP(Gen)/93-94 dated 22 March 1994 addressed to all the Regional Offices. As prudential norms have since been made applicable to Cooperative Banks also, the modified broad guidelines covering these developments are enclosed in Annexure I for ready reference.

(b) In order to assist the cooperative banks in preparation of DAPs, the ROs were requested to urgently convene the meeting of the chief executives of DCCBs and SCB/SCARDB and explain to them the various steps to be initiated to complete the exercise in time. For this purpose, the ROs were also requested to provide necessary assistance and guidance to the banks on one-to-one basis. Further, the ROs were also advised to take all possible measures for initiating advance planning at their level and develop suitable system and strategy to complete the MoU exercise within the stipulated time i.e. by 31 July 2000.

(c) As per the guidelines, there will be two separate MOUs to be signed with NABARD by State Government for the concerned SCB and SCARDB, as hitherto, covering broad policy and procedural aspects in conformity with the proposed cooperative reforms package of the state. However, in States which have integrated structure, only one MoU is to be signed by the State Government with NABARD and Apex Bank. This may include such aspects as approval of NABARD for appointing of CEOs at apex level institutions, supersession of the Board of Directors only with the approval of NABARD or at the instance of NABARD, freedom to banks in fixing up their rate of interest on deposits and advances, State Governments not to declare ban on recovery/waiver of interest etc., State Government's commitment to pass on the audit responsibility for apex level institutions and the district cooperative banks to professional Chartered Accountants in a time bound period, commitment of the Government to complete the audit of credit societies and other cooperative institutions who borrow from banks within 6 months from the close of the financial year, implementation of the norms for audit classification evolved by NABARD etc. The drafts of the proposed memorandum for SCB and SCARDB are given in the ensuing handouts. These MoUs were to be suitably modified to suit the specific requirements of each state. The MoU will remain valid for a period of 3 years or such further period as may be agreed upon by NABARD.

(d) Further, separate MoUs were to be executed between NABARD and the State Cooperative Bank/State Cooperative Agriculture and Rural Development Bank every year for each financial year. These MoUs will largely consist of commitments of these banks to achieve performance levels/ targets indicated in the MoU during the year. They would largely consist of financial parameters; but in case of banks requiring specific action on non-financial aspects also like action for recovery of NPA, observance of appropriate safeguards in lendings in specified sub-sectors/sectors, action under cases involved in frauds, embezzlements, etc., there would be operational commitments also. It was emphasized that an attempt should be made to keep the MoU brief and to the point and limited to more important aspects of operations only.

(e) The MoU with the apex level banks should be entered into before the close of May each year, failing which all types of credit or other facilities including grants, etc., to the institutions may have to be suspended.

(f) As regards the district level institutions viz. DCCBs and the PCARDBS, the MoUs were required to be entered into with the apex level institutions on patterns similar to the one entered into between NABARD and the apex level institutions. These MoUs were not be signed by NABARD RO. NABARD however would be guiding the apex banks and the district banks to finalise the MoUs and execute the same before the above date, viz., 31 May every year. A copy of each of these MoUs so executed would however to be lodged with NABARD.

ROLE OF RO :

The Officer-in-Charge of the Regional Office has been made personally responsible to ensure that the progress in implementation of the commitments by the banks as reflected in MoU is reviewed every quarter at the level of the Board. He may send appropriate notes for consideration and thereafter the views of the Board will also be considered at the level of the SLMRC, the convening of which on time will also have to be ensured by the Officer-in-Charge. In the case of districts where we have DDMs, the primary responsibility for the purpose will be that of the DDM and where we do not have DDMs, the DDOs will have the responsibility similar to that of Officer-in-Charge.

ANNEXURE I

DAP exercise for the year 2000-2001 to 2002-2003, should be done after attempting a SWOT analysis of the bank. The SWOT analysis basically enables the bank to understand the environment in which they are working. The SWOT analysis of different factors may be done in the following manner:

S - Strength

W - Weaknesses

O - Opportunities

T - Threats

While attempting the SWOT analysis it must be remembered that the strength and weaknesses are internal to the system, whereas opportunities and threats are external to the system. Each of the above factors whether internal or external has a bearing on the bank's working and therefore will have to be analysed carefully before drawing up the DAP.

2. Internal factors affecting the viability of the bank may be many such as low margin, inefficiency in raising the resources resulting in hidden cost, inefficiency in deployment of funds in various assets leading to leakage and sub-optional yield, lack of follow up of loan accounts, deficiencies in the system of inspection, etc.

Similarly, the strength of the bank may be many for e.g. network of the bank itself, its trained manpower, large clientele etc. Based on the feedback received from the various SCBs, etc. banks have been in a position to improve their viability on account of strengthening the following areas.

i Improvement in recovery

ii. Improvement in financial margin

iii. Increase in profit

iv. Decrease in losses

v. Bringing down the cost of management

vi. Quick release of funds by State Govt. to cooperative banks towards share capital contribution, etc.

As indicated above, opportunities and threats are external to the institution. While opportunities can be used to counter weaknesses and therefore, adds to strengths. Further, not all threats may be under the control of the bank. Based on the feedback received by us on implementation, some banks have been found to be in a position to improve their viability and profitability by taking advantage of some of the opportunities and warding off some of the threats as indicated below:

Strengths

I. Diversification in loaning

ii. Exploitation of new business potentials

iii. New deposit and advance products development to meet client specific requirements.

iv. Market segment specific strategy

v. Improvement in business by utilising assistance from CDF

vi. Improvement in bottom line by taking advantage of deregulation of interest rates.

vii. Timely intervention by the bank helping in avoiding loan waiver by State Government, etc.

Threats:

i. Increased political intervention in recovery efforts

ii. Frequent changes in CEOs

iii. Irregular conduct of SLMRC/DLMRC meetings

iv. Poor response from State Govt.

v. Loss of business on account of increased competition

The above factors are only illustrative in nature but not exhaustive. Based on the above SWOT analysis , it will be possible for the bank to have a detailed understanding of the internal environment in which it is placed and this may be utilised for making business plans under DAP 2000-2003, which may be finalised as per Part II - A and II - B. Further, a detailed analysis in respect of the critical factors, such as Deposits, Borrowings, Cash and bank balances, Loans and advances, Investments, Non-earning and non-performing assets, Transaction cost, Miscellaneous income, etc., may also be made for last four years for attempting the projections to be made the DAP.

The guidelines issued by NABARDvide.Circular No.NB.IDD.COOP/3765 and 3783/ACP/93-94 dated 21 March and 23 March 1994 issued to SCBs and SCARDBs respectively, may be referred to for concept clarity on various terms and strategic inputs. However, for ready reference, the guidelines, with a few modifications are also included in Part II A and Part II B of this Annexure.

Broad Guidelines

for preparation of next round of

Development Action Plans for SCBs/DCCBs

2000-2001 to 2002-2003

Introduction

The Cooperative banks in short-term structure have adopted the strategy of preparing Development Action Plans as an internal strategic planning exercise since the year 1994-95. The process has helped to create an awareness in the cooperative banks about the need for strategic planning with an integrated approach taking into account all the factors affecting operational efficiency. The phasing of the Base DAPs prepared by SCBs/DCCBs as per the earlier guidelines issued by NABARD had generally come to an end by 31 March 2000 in most of the banks. To consolidate the gains in the system effected by DAP, it has been decided to continue the exercise of preparation of next round of base level DAPS. To ensure uniform implementation of the scheme, the phasing of second round of base DAPs will. be from 2000-2001 to 2002-2003 for all the banks

While the guidelines for the second round broadly conform to the earlier guidelines, minimum modifications to take care of the policy changes during the period are made in the revised guidelines.

1. Objectives

The objective of the Development Action Plan (DAP) continues to ensure internalisation of strategic planning in the cooperative banks. Accordingly, the exercise will attempt to create an appreciation for such internal strategic planning to address and confront external constraints. Accordingly, the DAP will identify factors affecting the performance, analyse and prioritise the factors and suggest strategies covering both financial and other viability aspects.

2. Methodology

As the PACS and other ground-level institutions such as weavers' societies, marketing societies, industrial societies, etc. are the constituents through which the DCCBs operate, DAPs would have to be prepared based on a "bottom-up' approach taking into account the performance of these institutions and also planning for improvement in their functioning and strengthening them. The plan should include the strategy for loan diversification and direct lending by branches of DCCBs and SCB as well.

3. Contents of DAPs

The broad frame-work and contents of the DAPs may be as under:

(A) Management and Organisation - HRD efforts

Elected Boards (Supersession, if any, since when) - Composition of the Board Constitution of the Committee of Management where Boards have been superseded. Organisational set up, staff position - details of staff on deputation, details of technical staff - TME Cells, professionalisation, appointment of Financial Analyst, system of staff recruitment, motivation/incentives - training arrangements - data on trained staff (category-wise). In case of PACS, position of full time paid secretaries, their training particulars - status of cadre scheme, if operative, cadre fund arrears, etc. The contents should include specific HRD efforts to be initiated during the period.

(B) Business and Operations

PACS :

Status of viability of PACS - Classification according to size of loan business particulars of non-credit business - comment on the progress in reorganisation and liquidation of PACS -profitability analysis, new business development by potential PACS. Availability of office/godown (own or rented).

DCCB :

Details of owned funds - proposals for augmentation.

Deposits --deposit-mix existing and proposed (with a view to tapping the existing potential and reducing the cost of deposits).

Borrowings - source - extent - cost.

Loans and advances - Analysis of loans issued and outstanding separately Purpose-wise, region-wise, size-wise, etc. analysis.

Credit potential - Scope and strategy for step up of loans and diversification, the direct scope for development of NFS including Handlooms, export-oriented and agro-processing industries, marketing and processing activities, etc. - availability of linkages/Government support - other business like consumer loans, etc.

Management of funds - Compliance with statutory requirements such as CRR, SLR and other provisions of BR Act as also State Co-operative Societies Act - Deployment of surplus resources.

non-credit business-Present position and potential for non credit business (issue of letter of credit, providing locker and other facilities, collection of cheques, issue of draft, jewel loans, issue of guarantees, etc.) - In the case of PACS, specific comments on handling of PDS.

Recovery performance - Comments on recovery under principal and interest separately (under arrear and current dues) - In-depth analysis of overdues Purpose-wise, region-wise, age-wise, activity-wise - Constraints (internal & external) Measures for improving recovery performance (branch-wise, staff-wise targets, accountability, follow-up, monitoring plans) - Details of legal action taken - Pendency of EP- cases, cases under arbitration, etc. - government support required and available- specific recovery strategy for current demand.

Profitability - Current profit/loss - Accumulated profits/ losses - Analysis of accumulated profits/ losses - Imbalances - amount involved in misappropriation, fraud, embezzlements, etc. - Steps for improving profitability -in the case of PACS, Profit/loss on account of PDS activities / fertiliser distribution consumer business and any such activities undertaken - Comments on treatment of unrealised interest in profit and loss statement - if in loss, reasons therefor - Comments on guarantee fee, audit fee and other overheads.

Implementation of Prudential Norms- Asset Classification : Standard Asset, Sub Standard Asset, Doubtful Asset and Loss Asset ; Provisioning Norms 0.25 percent for Standard Asset; 10% of total outstanding for Sub Standard Asset; 100% on unsecured portion and 20%, 30% or 50% of secured portion for a period upto 1 year, 1 year to 3 years and beyond 3 years respectively for Doubtful Assets; and 100% of the entire outstandings for Loss Assets.

Viability analysis - Financial return (interest and other income) - Financial cost (cost of raising resources) - Impact of deregulation - of interest rates - Gross margin - Cost of Management - Net Margin - Strategy for improvement in margin during DAP period.

As the prudential norms had been made applicable to cooperative banks w.e.f. 1996-97, the viability analysis of cooperative institutions should be made keeping in view the NPA level and its repercussions on the overall financial health of the co-op. institutions.

(C) Systems and Procedures

Loan policy and procedures - Delegation of powers - Internal checks and controls - Effectiveness of supervision over primaries by DCCBs & over DCCBs by SCB - Comments on vigilance set up existing/proposed - Audit and inspection - Comments on backlog of Audit and Inspection.

Management Information System - Efficacy of existing MIS - Scope for improvement - Existing status of and scope for computerisation.

Position obtaining in respect of various studies undertaken where the studies are complete, if complete, whether recommendations have since been adopted and internalised.

Status of ODI in DCCBs/SCB - their response-impact-future strategy

(D) Investment Plan

4. Break-even analysis

Break-even analysis with appropriate and realistic assumptions has to be attempted as in the first phase.

5. Implementation, monitoring of DAPS.

The success of DAPs would depend upon effective implementation, suitable monitoring arrangements at the levels of SCBs and DCCBs. In order to ensure successful implementation of DAP/MoU, the instructions with regard to setting up of Monitoring and Review Committee already issued will continue. Each of the SCBs and DCCBs will continue to have Institutional Development Cell with appropriate manpower for effective implementation and monitoring.

For effective implementation of DAP, it is necessary that the base DAPs are broken into annual performance projections. For this purpose, the DAPs are envisaged to be in the nature of rolling plans wherein the projections for ensuing years may have to be revised at the end of previous year, mostly based on the projections/annual achievements in the previous year reviewed by the Review and Monitoring Committees both at state and district level which have already been set up both at state and district levels. Institutional Development Cell to review the implementation of DAP has also been in position in majority of the SCBs.

The accomplishment of target under DAP/MoU by the end of 31 March 2000 is yet to be analysed. However, position by the end of 31 March 1999 was more or less satisfactory in Cooperative Banks except under working results. All the institutions have good scope for improvement under recovery. The micro level performance under business parameters needs further efforts. There is however, cost consciousness amongst the cooperatives. Though lending rates have become dynamic unlike earlier years, there is good scope for improvement, especially, where the lending rates are driven down by RCS/State Government.

The areas of concern are, increase in number of banks falling under Section 1 1 of BR Act, reluctance of some of the State Govt. to be a party to MoU in respect of SCBs, etc.

Annexure - II

Draft of Base MOU (for 3 years) to be entered into by SCB with State Government and NABARD

Strengthening of ST Cooperative Credit Structure State:

Memorandum of Understanding

I Objective

(Please briefly discuss about the objective of the second phase of DAP-MOU, the impact of the first phase, etc.).

1.2 At the instance of National Bank for Agriculture and Rural Development (NABARD),

the DCCBs, SCB in State have prepared DAPs as a part of the exercise for their financial strengthening and organisational improvement. Comments / Suggestions for improving the DAPs will be separately communicated to the DCCBs by the SCB. With a view to enlarging the flow of credit and to ensuring the sustainable viability as also operational efficiency of the structure, the State Governments as well as the SCBs and DCCBs in the state have to implement the Action Plan within a specific time frame.

1.3 This Memorandum of Understanding is entered into by the State Government and SCB

with NABARD on to ensure satisfactory compliance with the more important items of the Action Plan as a pre-condition for continued financial and other support from NABARD. This MoU shall remain valid for a period of three years from the date of execution or such further period as agreed upon by NABARD.

2. Overview

(Please briefly discuss the problems of the ST cooperative credit structure in the state, the initiatives taken so far, the impact of these initiatives, the possible solutions to the existing problems, etc.)

3. Key Action Points

(Please mention, based on the DAP of the SCB, the summary of performance obligations expected from PACS and DCCBs as the case may be.) Also parties to this MoU shall take necessary steps in their respective areas to ensure the achievement of the macro level performance obligations under each of the following heads.

3.1 Business and Operations

3.1.1 Viability of DCCBs/PACS

The SCB in consultation with the State Govt., RCS will undertake to work out a viability package for loss making DCCB and evolve norms for monitoring the implementation of the package.

Similarly, SCB in consultation with DCCBs will undertake to work out a viability package for loss making PACS and to evolve norms for monitoring of the implementation of the package.

RCS may initiate appropriate action for amalgamation, reorganisation or liquidation of the non-viable PACS and complete the same as early as possible.

The SCB / DCCBs will also undertake to evolve a mechanism to improve the planning exercise-of the PACS and help them to prepare more comprehensive plans covering all aspects of their working.

The SCB in association with DCCBs will arrange to have a review of the profitability of the PDS and other non-credit businesses of PACS and ensure discontinuance of such businesses which are not likely to make profits.

The fluid resources requirements of PACS and the forms in which this can be kept will be reviewed by the State Government.

3.2 Share Capital

In the- interest of strengthening the equity base of PACS, the State Government may consider making an additional Share Capital contribution. The DCCBs will work -out the district-wise proposals in this regard and submit the same to the State Government. All the DCCBs will propose to strengthen their equity base and the State Government will also consider making additional contribution in a phased manner subject to budget provisions. The State Government will also consider contribution of additional share capital for strengthening the equity base of the SCB in a phased manner. NABARD will favourably consider providing loans to the State Government from the NRC(LTO) fund on-the basis of suitable proposals to be made in this regard by the State Government and subject to fulfillment of the prescribed norms and conditions.

3.3 Profits and Dividends

Prompt and proper implementation of the DAPs is expected to improve the profitability of DCCB substantially and this should result in declaration of reasonable dividend to PACS which have contributed largely to the DCCB's share capital. Normally, the DCCBs have been at best, declaring only nominal dividend. The practice and instructions in this regard will be reviewed by the RCS And the necessary modifications effected so as to ensure declaration of reasonable dividend by profit making DCCBs to PACS and also by PACS to their members.

3.4 Interest Rates

The cooperative banks have now been given freedom in respect of interest rates to be paid by them on deposits of all types as also to be charged by them on advances (subject to a minimum of 12%). Being, the last rung of the three tier structure, interest rates in respect of the PACS also need to be in consonance with those of the other two tiers, specially as one of the major problems encountered by the system emanates from the high cost deposits mobilised by the PACS which have flown to the upper tiers. A suitable machinery under the leadership of the SCB may be set up to recommend the appropriate interest rates on various types of deposits and advances in the structure. The State Govt. may therefore give freedom to the banks in fixing up the rates of interests on both advances and deposits.

3.5 Deposit Mobilisation

In order to achieve the. projected level of deposits, the SCBs and the DCCBs will evolve appropriate strategy and yearly plans for themselves as well as PACS. The Deposit Guarantee Scheme, if any, introduced by the State Government for deposit with PACS, should cover all the PACS and evolves certain financial liability and administrative responsibility on the DCCBs also. If necessary, the RCS may review the entire scheme and examine the feasibility of extending it to all functioning PACS and work out an appropriate cost sharing fund.

3.6 Borrowings

The SCB will ensure that each DCCB prepares the plans for borrowing and repayment thereof by PACS commensurate with the increase in projected resources in these plans.

3.7 Investments

In order to ensure a level playing field in facing the competition from commercial banks, the SCB and DCCBs will be allowed a greater autonomy in their management of funds and other operations either individually or on a consortium basis keeping in view the relevant provisions of acts/rules, this will broadly cover investment of their surplus funds in suitable financial instruments with a view to diversify the investment operations of the bank. The SCB will submit suitable proposals in this regard to NABARD for liberalisation of the existing norms, if any.

3.8 Advances

In view of the near stagnation of traditional areas of business, the SCB and DCCBs will have to diversify the loans and advances portfolio significantly. The SCB will equip itself for appraisal, sanction and monitoring of large long term as well as short term working capital advances, individually or in a consortium arrangement with DCCBs/PACS, to commercially profitable ventures. The policy constraints, if any, will be taken up with NABARD/State Government by SCB. The SCB will help DCCBs in financing innovative schemes in agriculture such as tissue culture, floriculture, agro/food processing, medicinal plants, biotechnology, etc. The SCB will prepare model projects / guidelines for such advances and circulate the same among the PACS/DCCBs.

3.9 Recovery Performance

(Please mention the measure, the SCB will undertake to draw a strategic plan incorporating, inter alia the steps to be taken with a view to improving the recoveries in the structure.)

The State Governments undertakes to initiate the following measures :

· Extend assistance and necessary support in recovery drive to SCB and DCCBs.

· Refrain from announcement of any remission of interest / loan waiver scheme vitiating the recovery climate.

· Not imposing ban on recovery of loans except in the event of natural calamities as also announcing interest waiver.

· Take timely steps to provide such information, including issue of Annewari certificates, etc., as may be required by the banks and other agencies to help the banking Industry in general and the cooperative banks in particular, to provide appropriate relief to the affected borrowers.

Making requisite budgetary provisions for meeting its share in conversion of short term loans into medium term from time to time in view of the natural calamities.
The State Government will take necessary steps for reduction in the delay in execution of decrees and finalisation of legal proceedings. RCS will issue suitable instructions to the departmental officers, EOs / Sale Officers connected with recovery for initiating action / executing EPs against defaulters of large loans. The SCB / DCCBs will apprise RCS about the progress in the disposal of the cases.

3.10 Non-Performing Assets:

The State Government / SCB shall take, steps to firm up the actual quantum of the erosion in the networth and work out a plan for external financial assistance on the lines suggested by Government of India for cleansing the balances sheets of potentially viable PACS / DCCBs indicating the possible contribution from the structure itself and the State Government preferably, at the earliest from the date of signing of the MoU.

3.11 Organisational Aspects

The SCB undertakes to ensure that the Managing Director appointed by its Board has sufficient expertise and experience in the relevant fields for managing the affairs of the bank in a professional manner. The State Govt. and SCB hereby undertake to consider amending the provisions so as to provide for the appointment / removal of the Managing Director by their Board with prior consultation of NABARD, if such amendments have not been already effected. Pending amendment to the by-laws, the CEOs of apex cooperative banks shall be appointed on a tenure basis (for a minimum of 3 years) with prior consultation with NABARD. For this purpose, the State Govt. shall constitute a committee consisting of, among others, the Secretary, Cooperation and Officer-in-Charge of NABARD RO to identify and select professionally competent persons for the post of CEO of the apex cooperative banks to be appointed with prior consultation with NABARD. Any change in incumbency should also be effected after prior consultation with NABARD. The supersession of the Board of Directors of SCB and DCCBs shall be done only in consultation with NABARD or at the instance of NABARD. In case of such supersession, the State Govt. shall constitute a Committee of Management consisting of, among others, the OIC of NABARD RO for looking after the affairs of the bank. The State Govt. shall also initiate suitable steps expeditiously for restoring the democratic management of these superseded Boards of banks.

3.12 Human Development and Systems and Procedures

The SCB will specify the studies to be undertaken in consultation with NABARD in view of the diversification of the business and required changes in the existing systems and procedures including Management Information System. The SCB will also state the design of the training and impart suitable training for different categories of officers of DCCBs and Secretaries of PACS. The SCB will undertake to arrange through ACSTI, deputation of the staff to the programmes of BIRD, CAB, BTC, NIBM and such other reputed institutions for providing specialized training to the middle/ senior level officers of the bank in areas of modem banking, including financial / funds management and services, foreign exchange business, etc.

3.13 Inspection and Internal Checks

The SCB/DCCBs shall undertake to ensure that balancing of books of accounts of their branches and reconciliation of inter branch / inter-bank adjustment accounts are up-to-date. The inspection by DCCBs of indebted societies, if in arrears, would be undertaken immediately. The SCBs and DCCBs will take up periodical surprise inspection of their indebted societies and also undertake special studies that may be considered necessary.

3.14. Audit

The RCS would undertake cost effective and timely audit of all the institutions in the three tier cooperative credit structure. The RCS will also review the position and fix a time-frame for completion of audits which are in arrears so that audit of all the credit societies is brought up-to-date. The RCS will also review the training requirements and arrangements of departmental auditors to equip them suitably for conducting audit in the changing business environment. Further, the State Govt. shall commit to pass on the audit responsibility for apex level institutions, district cooperative banks to professional Chartered Accountants in a time bound manner. The State Govt. further undertakes to complete the audit of credit societies and other cooperative institutions which borrow from banks within 6 months from the close of the financial year. The State Govt. also undertakes to implement the norms of audit classifications evolved by NABARD. The SCB and DCCBs will undertake to make suitable arrangements for concurrent internal audit.

3.15 Cooperative Development Fund (CDF)

The SCB will undertake to consider setting up CDFs out of their annual net profits, if not already set up earlier. The funds will be used for strengthening the PACS and other affiliated societies

(Please also mention the specific areas where CDF is to be utilised.)

3.16 Vigilance

The SCB will undertake to have appropriate vigilance machinery at Head Office to bring about effective checks and control and ensure close surveillance on the working of the entire structure, particularly, in the areas of financial discipline.

4. Implementation and Monitoring

The Review of fulfillment of the above performance obligations as also other obligations of SCB and DCCB shall rest with State Level Monitoring and Review Committee to. be constituted for the purpose, if not already constituted. The progress under the plan shall be reported to the Regional Office of NABARD at quarterly intervals. The committee shall comprise representatives each from State Govt., NABARD and SCB. The Chairman of the Committee will be the Agricultural Production Commissioner. The Committee will meet at least once in a quarter. The convenor of the committee shall be the State Cooperative Bank.

ANNEXURE - IV

MODEL DRAFT - ANNUAL MOU - SCBs

Memorandum of Understanding

(Model draft for Short Term Structure - SCB)

With a view to strengthening the short term cooperative credit structure in

State/ Union Territory, based on its State Action Plan (SAP)/ Development Action Plan (DAP), the State Cooperative Bank has entered into a Memorandum of Understanding ( MoU ) with NABARD on spelling out performance obligations under various financial parameters at the level of SCB, as also at the macro level of DCCBs and PACS, covering a period upto and action points having a bearing on their organisational strengthening, financial viability and operational efficiency.

2. Having regard to the performance during the previous year (2000-01), status of compliance on the action points incorporated in the above MoU and other related developments, it has been agreed through this Supplementary Memorandum of Understanding for the current year (2001-02) that the parties to this MoU shall take all necessary steps in their respective areas to ensure that the performance obligations under various financial parameters for the current year (2001-02) as specified in the Annexure are achieved under each head;

3. It has also been agreed that provision of refinance and other support to/on behalf of the bank from NABARD will be linked to performance under financial parameters by the bank with reference to certain bench marks (as may be specified by NABARD from time to time).

Signed on this day of .. Two thousand one on behalf of the following parties.

Managing Director Chief General Manager/

State Coop. Bank Ltd. General Manager

NABARD, Regional Office

Note1 . In the case of State / UTs where there is no long term cooperative credit structure, the words 'short term cooperative credit structure' may be substituted by the words 'cooperative credit structure'.

2. In the case of States / UTs having 2 tier structure (SCB and PACS) the words DCCBs wherever appearing may be deleted and paragraph 2 (ii) may also be deleted.

ANNEXURE (SCB level MoU)

Performance Obligations

State Cooperative Bank Ltd. (Rs.crores)

Sr. No.	Particulars	Projections for the previous year (2000-0 1)	Actuals for the previous year (2000-01)	Projections for the current year (2001-02)	Projected growth rate (%) in respect of business levels for the current years (2001-02)
1	2	3	4	5	6

A. Business Levels

1. Owned Funds (Total)

(a) Share Capital

Of which from State Government

(b) Reserves and other Funds/ Provisions

2. Deposits (Total)

(a) Demand deposits

(b) Term deposits

3. Borrowings outstanding (Total)

(a) From NABARD

(b) From Others

4. Investments (Total)

(a) SLR

(b) Others

5. Loans issued (Total)

(a) Short-term

(b) Medium-term

6. Loans and Advances Outstanding (Total)

(a) Term Loans

(i) ST

(ii) MT

(iii) LT

(b) Cash credits and overdrafts.

7. Total Working Capital

B. Recovery Performance

1. Percentage of Recovery to Demand ( July-June)-Overall

(a) Principal

(b) Interest

2. Total Overdues ( June end)

(a) Term Loans

(b) Unrenewed cash credits and overdrafts

3. Overdues over 3 years (June end )

(a) Term Loans

(b) Unrenewed cash credits and overdrafts

C. Classification of Assets

(as per prudential norms)

1. Standard

2. Sub Standard

3. Doubtful Assets

4. Loss Assets

5. Total Impaired Assets (2+3+4)

6. Total Impaired Assets as percentage

a) to total assets

b) to total loan outstanding

D. Costs and Margins (as a percentage to Working Capital)

1. Net Financial Margin

2. Cost of Management

3. Net Margin (1-2)

E. Working Results

1. Annual Profit (+) / Loss (-)

2. Accumulated losses, if any

F. Per employee productivity

G. Specific action plans (Please see 2d of the letter)

II. DCCBs in State at macro level

(Rs. crores)

Sr.No.

Particulars

Projections for the previous year (2000-0 1)

Actuals for the previous year (2000-01)

Projections for the current year (2001-02)

Projected

growth rate

(%) in respect of business levels for the current years (2001-02)

1

2

3

4

5

6

A. Business Levels

1. Owned Funds (Total)

(a) Share Capital

Of which from State Government

(b) Reserves and other Funds/ Provisions

2. Deposits (Total)

(a) Demand deposits

(b) Term deposits

3. Borrowings outstanding (Total)

4. Investments (Total)

(a) SLR

(b) Others

5. Loans issued (Total)

(a) Short-term

(b) Medium-term

6. Loans and Advances Outstanding (Total)

(a) Term Loans

(i) ST

(ii) MT

(iii) LT

(b) Cash credits and overdrafts.

7. Total Working Capital

B. Recovery Performance

1. Percentage of Recovery to Demand ( July-June)-Overall

(a) Principal

(b) Interest

2. Total Overdues ( June end )

(a) Term Loans

(b) Unrenewed cash credits and overdrafts

3. Overdues over 3 years (June end)

(a) Term Loans

(b) Unrenewed cash credits and overdrafts

C. Classification of Assets (as per prudential norms)

1. Standard

2. Sub Standard

3. Doubtful Assets

4. Loss Assets

5. Total Impaired Assets (2+3+4)

6. Total Impaired Assets as percentage

a) to total assets

b) to total loan outstanding

D. Costs and Margins (as a % to Working Funds)

1. Net Financial Margin

2. Cost of Management

3. Net Margin (1-2)

E. Working Results

1. DCCBs in profit

(a) Number

(b) Amount

2. DCCBs in Loss

(a) Number

(b) Amount

3. No. of DCCBs with no profit / no loss

4. Accumulated losses

a) No. of DCCBs

b) Amount

F. Productivity (Average for DCCBs in the State)

1. Per branch productivity

2. Per employee productivity

III. PACS in State at macro level

(Rs.crores)

A. General

1. Total No.of PACS

2. No.of PACS having full-time paid Secretaries

Of which trained

3. Total membership (000)

4. Borrowing membership (000)

B. Business Levels

1. Owned Funds (Total)

a) Share Capital

Of which from State Govt.

(b) Reserves and other Funds/ Provisions

2. Deposits

3. Borrowings

4. Loans issued

5. Loans outstanding

6. Total Working Capital

7. Per PACS loan business

C. Recovery Performance

1. % of Recovery to Demand (July-June)-Overall

(a) Principal

(b) Interest

2. Total Overdues (June end)

(a) Term Loans

(b) Unrenewed cash credits and overdrafts

3. Overdues over 3 years (June end)

D. Costs and Margins ( as a % to Working Capital)

1. Net Financial Margin

2. Cost of Management

3. Net Margin (1-2)

E. Working Results

1. PACS in profit

(a) Number

(b) Amount

2. PACS in Loss

(a) Number

(b) Amount

3. No.of PACS with no profit / no loss

4. Accumulated losses

a) Number

b) Amount

F. Productivity (Average for PACS in the State)

1. Per PACS productivity

2. Per employee productivity

Memorandum of Understanding

(Model draft for Short Term Structure - DCCB)

With a view to strengthening the short term cooperative credit structure in

State/Union Territory, based on its State Action Plan (SAP)/Development Action Plan

(DAP), the District Central Cooperative Bank has entered into a Memorandum of Understanding (MoU) with State Cooperative Bank on spelling out performance obligations under various financial parameters at the level of DCCB, as also at the macro level of PACS, covering a period upto and action points having a bearing on their organisational strengthening, financial viability and operational efficiency.

2. Having regard to the performance during the previous year (2000-01), status of compliance to the action points incorporated in the above MoU and other related developments, it has been agreed through this Supplementary Memorandum of Understanding for the current year (2001-02) that the parties to this MoU shall take all necessary steps in their respective areas to ensure that:

i. the performance obligations under various financial parameters for the current year (2001-02) as specified in the Annexure are achieved under each head;

ii .each DCCB enters into MoU with SCB for the current year (2001-02) on similar lines, by .

Signed on this day of Two thousand one on behalf of the following parties.

Managing Director Managing Director

State Cooperative Bank Ltd. District Central Cooperative Bank Ltd.

ANNEXURE

(DCCB level MoU)

Performance Obligations

I. District Central Coop.Banks Ltd. ( State)

(Rs.crores)

A. Business Levels

1. Owned Funds (Total)

(a) Share Capital

Of which from State Government

(b) Reserves and other Funds/ Provisions

2. Deposits (Total)

(a) Demand deposits

(b) Term deposits

3. Borrowings outstanding (Total)

4. Investments (Total)

(a) SLR

(b) Others

5. Loans issued (Total)

(a) Short-term

(b) Medium-term

6. Loans and Advances Outstanding (Total)

(a) Term Loans

(i) ST

(ii) MT

(iii) LT

(b) Cash credits and overdrafts.

7. Total Working Capital

B. Recovery Performance

1. Percentage of Recovery to Demand (July-June)-Overall

(a) Principal

(b) Interest

2. Total Overdues (June end)

(a) Term Loans

(b) Unrenewed cash credits and overdrafts

3. Overdues over 3 years (June end)

(a) Term Loans

(b) Unrenewed cash credits and overdrafts

C. Classification of Assets (as per prudential norms)

1. Standard

2. Sub Standard

3. Doubtful Assets

4. Loss Assets

5. Total Impaired Assets (2+3+4)

6. Total Impaired Assets as percentage

a) to total assets

b) to total loan outstanding

D. Costs and Margins (as a % to Working Capital)

1. Net Financial Margin

2. Cost of Management

3. Net Margin (1-2)

E. Working Results

1. Branches in profit

(a) Number

(b) Amount

2. Branches in Loss

(a) Number

(b) Amount

3. No.of branches with no profit / no loss

4. Annual Profit (+)/Loss (-)

5. Accumulated losses, if any

F. Productivity

a) Per branch productivity

b) Per employee productivity

F. Productivity (Average for DCCBs in the State)

1. Per branch productivity

2. Per employee productivity

G. Specific action plans :

Explanatory Notes to (Performance Obligations)

to the Annexure to the Annual MoUs - Short Term Structure

1. General

(1) The SCB level MoU will contain the performance obligations for (a) the concerned SCB,

(b) DCCBs in the state at macro level and (c) PACS in the state at macro level.

(ii) The DCCB level MoU will contain the performance obligations for (a) the concerned DCCB and (b) PACS in the district at macro level.

(iii) The performance obligations under various financial parameters may be finalised on the basis of the latest available data (atleast upto end December of the previous year). These parameters may, however, be suitably updated/revised, if necessary, based on the tentative/final data for the entire previous year, before execution of the annual MoU.

2. Business Levels

(i) The figures under col.3 to 5 against all the parameters except 'Loans issued' should be with reference to the respective financial year end position.

(ii) The figures under col.3 to 5 against 'Loans issued' should be with reference to loans issued/ projected to be issued during the respective financial year.

(iii) The figures of share capital from the State Government under col.3 to 5 are to be reported in brackets. The difference between col.4 and col.5 will ordinarily represent the additional share capital projected to be contributed by the State Government provided no retirement 'of share capital is envisaged during the year. If any retirement of State Government's share capital is envisaged, the same may be explained by way of a foot note.

(iv) The figures of 'Reserves, and Other Funds/Provisions' should include, inter-alia, all provisions which are not in the nature of outside liabilities including Overdue Interest Reserve/Provision.

(v) 'Total Working Capital' may be taken as a sum total of balance sheet items less contra items.

(vi) The projected growth rate under col. 6 may be reported only in respect of business levels.

3. Recovery Performance

(i) The percentage of recovery to demand July-June) may be indicated for both principal and interest taken together (overall) and separately for principal and interest.

(ii) The total overdues June end position) should be bifurcated under 'Term Loans' and 'Unrenewed Cash Credits and Overdrafts'.

4. Classification of Assets (as per prudential norms)

The classification of assets as per the prudential norms should be with reference to the financial year end position. Since the prudential norms have been made applicable to SCBs and DCCBs from 1996-97 only, the projections for the year 1996-97 need not be reported under col.3.

5. Costs and Margins (as a percentage to working Capital)

(i) Costs and Margins should be worked out with reference to average working capital for the respective financial year.

(ii) 'Net Financial Margin' may be worked out as under:

(A) Average yield on assets

( % of interest income as per income recognition norms to average working capital calculated on the basis of monthly/quarterly averages ).

(B) Average Cost of Funds

( % of interest paid/payable on deposits and borrowings to average working capital calculated on the basis of monthly/quarterly averages ).

(D) Miscellaneous Income (as % to average working capital)

(E) Risk Cost (as % to average working capital)

Risk cost would normally represent the incremental provisioning required to be made as per the prudential norms, as a three/five year moving average. Since the prudential norms have been made applicable to SCBs/DCCBs from 1996-97 only, the Risk Cost for 1996-97 and 1997-98 may be taken at a flat rate (say, 0.5% to 2.0%) on a case to case basis, which should be in tune with the bank's asset profile.

(F) Net Financial Margin (C + D - E)

Net Margin may be arrived at by netting the Cost of Management (or Transaction Cost) with Net Financial ' Margin. Thus, the difference between Net Financial Margin and Cost of Management will represent the net margin (+) Positive or (-) negative as the case may be).

6. Productivity

The per branch productivity and per employee productivity may be worked out with reference to (a) deposits + loans and advances outstanding and (b) loans and advances outstanding, separately.

Broad Guidelines for preparation of

Development Action Plans for SCARDBs/PCARDBs

2000-2001 to 2002-2003

Introduction

The ARDBs in long term structure have adopted the strategy of preparing Development Action Plan as an internal strategic planning exercise since the year 1994-95. The process has helped to create an awareness in the cooperative banks about the need for strategic planning with an integrated approach taking into account various factors affecting their operational efficiency. The phasing of the Base DAPs prepared by SCARDBs/PCARDBs as per the earlier guidelines issued by NABARD had generally come to an end by 31 March 2000 in most of the banks. To consolidate the gains in the system effected by DAP, it has been decided to continue the exercise of preparation of next round of Base DAPs. The phasing of second round of base DAPs will be from 2000-2001 to 2002-2003 for all the banks to ensure uniform implementation of the scheme.

While the guidelines for the second round broadly conform to the earlier guidelines, minimum modifications to take care of the policy changes during the period are made in the revised guidelines.

1. Objectives

The objective of the Development Action Plan (DAP) continues to facilitate internalisation of strategic planning in the cooperative banks. Accordingly, the will attempt to create an appreciation for such internal strategic planning to exercise address and confront external constraints. Accordingly, the DAP will identify factors affecting the performance, analyse and prioritise the factors and suggest strategies covering both financial and other viability aspects.

2. Methodology

As the PCARDBs. are the constituents through which the SCARDBs operate under federal structure, DAPs would have to be prepared based on a "bottom-up" approach taking into account the performance of these institutions and also planning for improvement in their functioning and strengthening them. The plan should include the strategy for loan diversification and direct lending by branches of PCARDBs/SCARDB as well.

3. Contents of DAPs

Critical comments on the status of all important items may be incorporated'. It may be ensured that the projections for future years are based on available potential and are realistic. Sustainability, outreach and strategic planning to meet the emerging challenges, rather than mere review of past performance, need to be the guiding principles.

The broad framework of the DAP may be as under-.

(A) Management and Organisation - HRD efforts

(B) Business and Operations

Details of owned funds - proposals for augmentation, increasing the borrowing membership.

Deposits - scope for tapping more rural deposits (as per the existing guidelines for mobilising deposits by SCARDBs)- scheme status-impact-difficulties in implementation.

Borrowings -sources-extent-cost. Plan for borrowings from other sources, if any, such as NHB/NCDC etc.

Loans and advances - Purpose-wise, Region-wise, Size-wise analysis of loans issued and outstanding separately - Growth rate, etc. - Sectoral imbalances, if any, the reasons therefor - Corrective steps proposed. Level own capital and free reserves as a ratio to loans outstanding.

Credit potential - Scope and strategy for step up of loans and diversification - Scope for development of NFS and plan for exploiting the potential, etc. - availability of linkages/Government support - other business like housing loans, etc.

Management of Funds - Deployment of surplus resources, if any, judicious management of funds - Compliance with instructions of RBI, NABARD, RCS, etc.

Recovery performance - Comments on recovery under principal and interest separately (under arrear and current dues) - In-depth analysis of overdues Purpose-wise, region-wise, age-wise, activity-wise - - Measures for improving recovery performance (branch-wise, staff-wise targets, accountability, follow-up, monitoring plans) - Details of legal action taken - Pendency of EP cases, cases under arbitration, etc. - Government support available and required.

Implementation of Prudential Norms (Income Recognition, Asset Classification & Provisioning Norms)- Asset Classification : Standard Assets, Sub Standard Assets, Doubtful Assets and Loss Assets - Provisioning Norms., 0.25% provision for Standard Assets; 1 0% of total outstanding for Sub Standard Assets; 1 00% on unsecured portion and 20%, 30% or 50% of secured portion for a period upto 1 year, 1 year to 3 years and beyond 3 years, respectively for Doubtful Assets; and 100% of the entire outstandings for Loss Assets.

Profitability - Current profit/loss - Accumulated profits/ losses - Analysis of accumulated profits/ losses imbalances - amount involved in misappropriations, frauds, embezzlements, etc. Steps for improving profitability - Comments on treatment of unrealised interest in profit and loss statement - Comments on guarantee fee, audit fee and other overheads.

Viability analysis (statements II to V) - Financial return (interest and other income) Financial cost (cost of raising resources) - Gross margin - Transaction cost - Net Margin - Strategy for increasing/improving margin during the DAP period.

As the prudential norms had been made applicable to cooperative banks w.e.f. 1997-98, the viability analysis of cooperative institutions should be made keeping in view the NPA level and its repercussions on the overall financial health of the cooperative institutions.

(C) Systems and Procedures

Loan policy and procedures - Delegation of powers - Internal checks and controls Effectiveness of supervision over primaries by SCARDBs - Comments on vigilance set up existing/proposed - Audit and Inspection - Comments on backlog of Audit and Inspection.

System of MIS in vogue-- Efficacy of existing MIS - Scope for improvement - Existing status of- and scope for computerisation.

Position obtaining in respect of various studies undertaken where the studies are complete, if complete, whether recommendations have since been adopted and internalised.

4. Break-even analysis

Break-even analysis with appropriate and realistic assumptions has to be attempted as in the first phase.

5. Implementation, monitoring of DAPs.

The success of DAPs would depend upon effective implementation and, suitable monitoring machinery at the levels of SCARDBs and PCARDBs. In order to ensure successful implementation of DAP/MoU, the instructions with regard to setting up of Monitoring and Review Committee are already in place. An Institutional Development Cell with appropriate manpower might already have been set up in SCARDB/PCARDBs to ensure effective implementation and monitoring of DAP. This may be, commented upon.

For effective implementation of DAP, it is necessary that DAPs are broken into annual performance projections. For this purpose, the DAPs are envisaged to be in the nature of rolling plans wherein the projections for ensuing years will have to be revised at the end of previous year, mostly based on the projections/annual achievements in the previous year reviewed by the Review and Monitoring Committees both at state and district level. It has been observed that these committees have mostly been set up both at state and district levels. Institutional Development Cells to review the implementation of DAP have also been set up in majority of the SCARDBs.

Impact of earlier DAP

The accomplishment of target under DAP/MoU by the end of 31 March 1999 was more or less satisfactory in Cooperative Banks except under working results. The position of 31 March 2000 are yet to be available and analysed. All the institutions have good scope for improvement under recovery. SCARDBs and PCARDBs may have to improve their outreach also. The micro level performance under business parameters requires serious efforts. The cost consciousness amongst the cooperatives is yet to be achieved, Though lending rates -have become dynamic unlike earlier there is good scope for improvement especially where the lending rates are driven down by RCS/ State Government.

The areas of concern are growing reluctance on the part of State Governments to give government guarantee/mandate for SCARDBs and also, reluctance of some of the State Governments to be a party to MoU in respect of SCARDBs.

Annexure - III

Draft of Base MOU

[for 3 years)

to be entered into by

SCARDB with State Government and NABARD

Strengthening of LT Cooperative Credit Structure State ............................

Memorandum of Understanding

I . Objective

(Please briefly discuss about the objective of the second phase of DAP-MOU, the Impact of the first phase, etc.)

1.2 At the instance of National Bank for Agriculture and Rural Development (NABARD), the SCARDB in State has prepared DAP as a part of the exercise for its financial strengthening and organisational improvement. With a view to enlarging the flow of credit and to ensuring the sustainable viability as also operational efficiency of the structure, the State Governments as well as the SCARDB in the state have to implement the Action Plan within a specific time frame.

1.3 This Memorandum of Understanding is entered into by the State Government and SCARDB with NABARD on to ensure satisfactory compliance with the more important items of the Action Plan as a pre-condition for continued financial and other support from NABARD. This MoU shall remain valid for a period of three years from the date of execution or such further period as agreed upon by NABARD.

2. Overview

(Please briefly discuss the problems of the LT cooperative credit structure in the state, the initiatives taken so far, the impact of these initiatives, the possible solutions to the existing problems, etc.)

3. Key Action Points

(Please mention, based on the DAP of the SCARDB, the summary of performance obligations expected from PCARDBs.) Also parties to this MOU shall take steps in their respective areas to ensure the achievement of the macro level performance obligations under each of the following head.

3.1 Business and Operations

3.1.1 Viability of PCARDBs

The SCARDB in consultation with the State Govt., RCS will undertake to work out a viability package for loss making PCARDBs and evolve norms for monitoring the implementation of the package. Similarly, SCARDB in consultation with PCARDBs will undertake to work out a viability package for loss making PCARDBs and to evolve norms for monitoring the implementation of the package.

RCS may initiate appropriate action for amalgamation, reorganisation or liquidation of the non-viable PCARDBs and complete the same as early as possible. The SCAR-DB will also undertake to evolve a mechanism to improve the planning exercise of the PCARDBs and help them prepare more comprehensive plans covering all aspects of their working.

3.2 Share Capital

The State Government will consider contribution of additional share capital for strengthening the equity base of the SCARDB/PCARDBs in a phased manner. NABARD will favourably consider providing loans to the State Government from the NRC(LTO) fund on the basis of suitable proposals to be made in this regard by the State Government and subject to fulfillment of the prescribed norms and conditions.

3.3 Interest Rates

A suitable machinery under the leadership of the SCARDB may be set up to recommend the appropriate interest rates on various types of deposits and advances in the structure. The State Govt. may therefore give freedom to the SCARDB in fixing up the rates of interests on advances and deposits if any.

3.4 Borrowings

The SCARDB will ensure that each PCARDB prepares the plans for borrowing and repayment thereof, Commensurate with the increase in projected resources in these plans.

3.5 Investments

In order to ensure a level playing field in facing the competition from commercial banks, the SCARDB and PCARDB will be allowed a greater autonomy in their management of funds and other operations either individually or on a consortium basis keeping in view the relevant provisions of acts/rules, this will broadly cover investment of their surplus funds in suitable financial instrument with a view to diversify the investment operations of the bank. The SCARDB will submit suitable proposals in this regard to NABARD for liberalisation of the existing norms, if any.

3.6 Advances

In view of the near stagnation of traditional areas of business, the SCARDB will have to diversify the loans and advances portfolio significantly. The SCARDB will equip itself for appraisal, sanction and monitoring of large long term as well as short term working capital advances, individually or in a consortium arrangement with PCARDBS, to commercially profitable ventures. The policy constraints, if any, will be taken up with NABARD / State Government by SCARDB. The SCARDB will help PCAPDBs in financing innovative schemes in agriculture such as tissue culture, floriculture, agro/food processing, medicinal plants, biotechnology, etc. The SCARDB will prepare model projects / guidelines for such advances and circulate the same among the PCARDBs.

3.7 Recovery Performance

(Please mention the measures, the SCARDB will undertake to draw a strategic plan incorporating, inter alia the steps to be taken with a view to improving the recoveries in the structure.)

The State Governments undertakes to initiate the following measures

Extend assistance and necessary support in recovery drive to SCARDB and PCARDBS.
Refrain from announcement of any remission of interest/loan waiver scheme vitiating the recovery climate.
Not imposing ban on recovery of loans except in the event of natural calamities as also announcing interest waiver.
Take timely steps to provide such information, including issue of Annewari certificates, etc., as may be required by the SCARDB/PCARDBs and other agencies to help the banking industry in general and the cooperative banks in particular, to provide appropriate relief to the affected borrowers. Making requisite budgetary provisions for meeting its share in conversion of short term loans into medium term from time to time in view of the natural calamities.
The State Government will take necessary steps for reduction in the delay in execution of decrees and finalisation of legal proceedings. RCS will issue suitable instructions to the departmental officers, EOs / Sale Officers connected with recovery for initiating action / executing EPs against defaulters of large loans. The SCARDB will apprise RCS about the progress in the disposal of the cases.

3.8 Non-performing Assets

The State Government / SCARDB shall take steps to firm up the actual quantum of the erosion in the networth and work out a plan for external financial assistance on the lines suggested by Government of India for cleansing the balances sheets of potentially viable PCARDBs indicating the possible contribution from the structure itself and the State Government preferably, at the earliest from the date of signing of the MoU.

3.9 Organisational Aspects

The SCARDB undertakes to ensure that the Managing Director appointed by its Board has sufficient expertise and experience in the relevant fields for managing the affairs of the bank in a professional manner. The State Govt. and SCARDB hereby undertake to consider amending the provisions so as to provide for the appointment / removal of the Managing Director by their Board with prior consultation of NABARD, if such amendments have not already been effected. Pending amendment to the by-laws, the CEOs of apex cooperative banks shall be appointed on a tenure basis (for a minimum of 3 years) with prior consultation with NABARD. For this purpose, the State Govt. shall constitute a committee consisting of, among others, the Secretary, Cooperation and Officer-in-Charge of NABARD RO to identify and select professionally competent persons for the post of CEO of the apex cooperative banks to be appointed with prior consultation with NABARD. Any change in incumbency should also be effected after prior consultation with NABARD. The supersession of the Board of Directors of SCARDB shall be done only in consultation with NABARD or at the instance of NABARD. In case of such supersession, the State Govt. shall constitute a Committee of Management consisting of, among others, the OIC of NABARD RO for looking after the affairs of the bank. The State Govt. shall also initiate suitable steps expeditiously for restoring the democratic management of these superseded Boards of banks.

3.10 Human Resources Development and Systems and Procedures

The SCARDB will specify the studies to be undertaken in consultation with NABARD in view of the diversification of the business and required changes in the existing systems and procedures including Management Information System. The SCARDB will also state the design of the training and impart suitable training for different categories of officers of PCARDBs. The SCARDB will undertake to arrange through JLTC, deputation of the staff to the programmes of BIRD, CAB, BTC, NIBM and such other reputed institutions for providing specialized training to the middle/ senior level officers of the bank in areas of modem banking, including financial / funds management and services, foreign exchange business, etc.

3.11 Inspection and Internal Checks

The SCARDB shall undertake to ensure that balancing of books of accounts by their branches and reconciliation of inter branch / inter-bank adjustment accounts are up-to-date. The SCARDB will take up periodical surprise inspection of PCARDB/ indebted societies and also undertake special studies that may be considered necessary.

3.12. Audit

The RCS would undertake cost effective and-timely audit of all the institutions in the three tier cooperative credit structure. The RCS will also review the position and fix a time-frame for completion of audits which are in arrears so that audit of all the credit societies is brought up-to-date. The RCS will also review the training requirements and arrangements of departmental auditors to equip them suitably for conducting audit in the changing business environment'. Further, the State Govt. shall commit to pass on the audit responsibility for apex level institutions, district cooperative banks to professional Chartered Accountants in a time bound manner. The State Govt. further undertakes to complete the audit of PCARDBs/credit societies and other cooperative institutions which borrow from banks within 6 months from the close, of the financial year. The State Govt. also undertakes to implement the norms of audit classifications evolved by NABARD. The SCARDB and PCARDB will undertake to make suitable arrangements for concurrent / internal audit.

3.13 Cooperative Development Fund (CDF)

The SCARDB will undertake to consider setting up CDFs out of its annual net profits, if not already set up earlier. The funds will be used for strengthening the PCARDBs. (Please also mention the specific areas where CDF is to be utilised.)

3.14 The SCARDBs will undertake to have appropriate vigilance machinery at Head Office to bring about effective checks and control and ensure close surveillance on the working of the entire structure, particularly, in the areas of financial discipline.

4. Implementation and Monitoring

The Review of fulfillment of the above performance obligations as also other obligations of SCARDB and PCARDBs shall rest with State Level Monitoring and Review Committee to be constituted for the purpose if not already constituted. The progress under the plan shall be reported to the Regional Office of NABARD at quarterly intervals. The committee shall comprise representatives each from State Govt., NABARD and SCARDB. The Chairman of the Committee will be the Agricultural Production Commissioner. The said Committee will meet at least once in a quarter. The convenor of the committee shall be the State Cooperative Agricultural and Rural Development Bank.

Explanatory Notes to (Performance Obligations) to the Annexure to the Annual MoUs - Long Term Structure

1. General

i. The SLDB level MoU will contain the performance obligations for (a) the concerned SLDB and (b) PLDBs in the state at macro level. The PLDB level MoU will contain the performance obligations for the concerned PLDB.

ii. In the case of states having federal structure, the parameters relevant to unitary or mixed structure (membership and working results of branches) will not be required to be incorporated in the SLDB level MoU.

iii. In the case of states having mixed structure (where SLDB is operating through its branches In some areas and through PLDBs in some other areas) the parameters relating to loans issued, loans outstanding, recovery and overdues may be indicated separately under 'direct loaning' and 'loaning through PLDBs'.

iv. The performance obligations under various financial parameters may be finalised on the basis of the latest available data (atleast upto end December of the previous year).

These parameters may, however, be suitably updated/revised, if necessary, based on the tentative/final data for the entire previous year before execution of the annual MoU.

2. Business Levels

(i) The figures under col.3 to 5 against all the parameters except loans issued! should be with reference to the respective financial year end position.

(ii) The figures under col. 3 to 5 against 'Loans issued' should be with reference to loans issued/projected to be issued during the respective financial year.

(iii) The figures of share capital from the State Government under col 3 to 5 are to be reported in brackets. The difference between col. 4 and col. 5 will ordinarily represent the additional share capital projected to be contributed by the State Government provided no retirement of share capital is envisaged during the year. If any retirement of State Government share capital is envisaged, the same may be explained by way of a foot note.

(iv) The figures of 'Reserves and Other Funds/Provisions' should include, inter-alia, all provisions which are not in the nature of outside liabilities including 'Overdue of Interest Reserve/Provision.'

v) Total Working Capital' may be taken as a sum total of balance sheet items less contra items.

(vi) The projected growth rate (%) under col. 6 may be reported only in respect of business levels.

3. Recovery Performance

(i) The percentage of recovery to demand (July-June) may be indicated for both principal and interest taken together (overall) and separately for principal and interest.

(ii) The figures of overdues should be with reference to June end position.

4. Costs and Margins (as a percentage to working capital)

(i) Costs and Margins should be worked out with reference to average working capital for the respective financial year.

(ii) 'Net Financial Margin' may be worked out as under.

A. Average yield on assets

(% of interest income as per income realised/realisable but not overdue, on the analogy of income recognition norms to average working capital calculated on the basis of monthly/quarterly averages).

B. Average Cost of Funds

(% of interest paid/payable on deposits and borrowings to average working capital calculated on the basis of monthly/quarterly averages).

C. Gross Financial Margin (A-B)

D. Miscellaneous Income (as % to average working capital)

E. Risk Cost (as % to average working capital) : Risk cost would normally represent the incremental provisioning required to be made as per the prudential norms, as a three/five year moving average. Since the prudential norms have been made applicable to SCARDBs from 1997-98 only, the Risk Cost may be taken at a flat rate (say, 0.5% to 2.0%) on a case to case basis, which should be in tune with the bank's asset profile.

F. Net Financial Margin (C+D-E).

Net Margin may be arrived at by netting the cost of Management (or Transaction Cost) with Net Financial Margin. Thus, the difference between Net Financial Margin and Cost of Management will represent the net margin (+ positive or - negative as the case may be).

Productivity

The per branch productivity and per employee productivity may be worked out with reference to (a) deposits + loans and advances outstanding and (b) loans and advances outstanding, separately.

Organisation Development Intervention

Broad Framework

Definition of ODI

ODI is a systematic, planned and integrated approach to improve the effectiveness of an organisation.

What is ODI ?

· ODI is a strategy for planned change and organisational growth.

· It involves the human resources of the Organisation at individual and group level.

• It deals with the specific problems and challenges of an Organisation.

• With its emphasis on experiential learning - learning during the process by focusing on feelings and responses of the employees ODI enhances the coping capabilities of an Organisation.

• ODI is a joint collaboration between the outside facilitator and the client - (DCCB/SCB/SLDB).

Institutional Strengthening (I.S.)

A process which facilitates and achieves change in organisations, typically through reform and development of systems, structures, staffing mix, skill, strategic planning, and shared values, taking into account the wider external environment in order to improve the effectiveness and efficiency with which the Organisation fulfills its mission.

ODI is the process which facilitates the Organisation in achieving the objectives of Institutional Strengthening.

Objective/Focus

Institutional strengthening is a holistic process. However proper focus will help the matters considerably.

In case of banks without viability - the focus could

be on

attainment of commercial viability

In case of profit-making banks, the focus could be on impose in Organisation culture and attainment 'social objective without affecting commercial viability.

Implications/Pre-conditions of

Institutional Strengthening

Extremely difficult to plan, design and implement.

Cannot have uniform formula/prescription.

Inputs should be flexible.
.
Engenders ownership/commitment to objectives mutually worked out and agreed to.
Objective should be realistic taking into account capacity of
institution.
· Careful and detailed monitoring mechanism.
Dynamic and committed leadership.
· Staff sufficiently motivated to back proposed change.

Basic Assumption

The ODI of CCBs is to be conducted by NABARD.
The officials of NABARD are to function as external consultants/facilitators.
They (officials of NABARD) have to adopt consultancy mode' and not service model in conducting ODI.
Consultancy mode pre-supposes that the employees working within the Organisation are the people who best know what is wrong with the Organisation. and how the Organisation can improve/change.'
Implementation of the 'action plan' so generated is the joint responsibility' of the Management, CEO, and the employees of the bank.
NABARD's Consultant must be voluntarily accepted by the cooperative bank concerned.
Each individual bank should be separately targeted and dealt with.

Period of action plan

ction

plan for strengthening of an institution should not be either short term or long term. It should

medium term and should normally be for a period of 3 years. It is quite possible that weak banks (especially those not complying with section 11 of BR Act 1949 (AACS) will not be able to attain viability within 3 years. We can, by realistic action plan, take them along the path of viability to a considerable extent.

The Meetings/Discussions in Groups

The CEO should initially introduce the facilitators (2) to the employees in general. Thereafter, the facilitators should meet them in groups.

He has to start the facilitation from the 2nd day in the bank. He should meet the different categories of the staff separately as under:

a. Officers in HO

b. Clerical Staff

c. Group 'C'/Messenger staff

d. Branch Managers/Accountants of branches

e. Secretaries of PACS

f. Some Customers

Each -group meeting will start with

i. Stakeholders analysis through Venn diagram . This would clarify to the employees of the bank, the purpose for which it was created, the clients it was required to serve, the user-friendliness of the bank, etc.

ii. Mission statement preparation.

iii. STEP Analysis for scanning external environment

iv. SWOT-Analysis for internal environment scanning

To facilitate discussions, the financial position of the bank, including net margin, cost of funds, etc. as calculated/compiled in case of DAP may be displayed in a flip chart/transparency.

Compilation

All the ideas generated from different groups/individuals, should now be arranged topic-wise i.e. (1) Share Capital, (2) Borrowings, (3) Deposits, (4) Loans and Advances, (5) Human Resource Development, etc. by the Facilitators in Flip Charts. There should be no editing as this stage.

Logical Frame Work (Log Frame)

The final recommendation of the groups should now be presented to the whole house for discussion, adoption and preparation of a 3 year action plan, with yearly break up. At the concluding stage of discussion, the CEO of the bank should be invited to give his reaction to the recommendation. A Log - Frame for the final recommendation/Action Plan should be prepared by the House (for 3 years).

Presentation to the Board

Action plan with Log-Frame should be presented to the Board of Directors of the bank for final comments and adoption. The 'Action Plan' can be modified, in keeping with the opinion of the Board and should be adopted finally as the action plan "as approved by the Board of the Bank".'

Staff of the Bank

The action plan, with Log - Frame, as approved by the Board, should be presented to all the employees of the bank in a Joint meeting, by the CEO of the bank, who should emphasize that the plan is the plan of the employees/their representatives. He should request all employees to prepare 'Personal Action Plan' in keeping with Bank's plan and submit it to their respective Head of the Department.

Monitoring

Since the 'Action Plan' is that of the bank, it is the CEO and Board of the Bank which should implement and monitor the same. The CEO should have a 'Monitoring Committee' in HO, in which representatives of all categories of staff including one BM and one PACS secretary should be members. The Committee should meet quarterly. An extract of committee's proceedings should be sent by

CEO

to the facilitators along with a DO letter explaining over/ under achievement and reasons therefor. Facilitators should request the CEO to send a progress report to him with a copy to RO. The Facilitator should keep in touch with the bank through letters and keep the RO informed. In case, any further assistance is required, the same can be given by him with the concurrence of RO-in-charge.

Second Visit of Facilitators

The facilitator can visit the bank after six months or so, to speak to employees to assess the commitment level in the bank. It would provide an opportunity to assess the direction in which the action plan is moving.

ODI - II

Since Log - Frame provides for measurability of the action plan, repeating the process of facilitation after six months would not be necessary. In a period of six months, the development also would not have crystallized appreciably for review and to have a relook at the

'Action Plan'. It is too short a period. Since the Action Plan is for a period of 3 years, a mid term review after one and a

half

years, (between 18 to 20 months) may be undertaken by the same facilitator unless serious constraints in the operationalisation of 'Action Plan' is faced and reported to the Facilitator by the CEO of the bank. This may necessitate a repeat ODI. it is, therefore, felt that ODI - II may be conducted as a mid term review between 18 to 20 months. This may last for one week.

ODI - III

A Final Review after 3 years i.e. between 37 to 40 months would normally suffice. This may also be done for one week.

Review by the Board

Facilitator should continue to get quarterly reports from CEO and the

Action Plan should be reviewed by the Board in each of its meetings.

The monitoring committee's report on progress in implementation of the

Action Plan should be put up to Board for discussion and extract of

Board proceedings should be sent to RO and Facilitators.

Annexure I

STEP BY STEP GUIDE TO ODI

PRE - ODI

I. Selection of DCCB by HO/RO.

2. Identification of Facilitators (Facilitators must undergo training in NBSC).

3. Facilitator prepares himself by going through DAP/MOU, Inspection Report, etc.

4. CEO is invited to RO/NBSC.

5. Facilitator discusses with CEO on a one to one basis about the situation in the DCCB and offers the ODI package.

6. CEO goes back and invites the Facilitator/RO to conduct the ODI.

7. Facilitators may visit the bank for 2/3 days before conducting ODI to familiarise themselves with the bank.

LAUNCHING OF ODI AT BANK

ODI at Bank - small groups

8. Facilitators arrive on the appointed date at the DCCB.

9. CEO introduces Facilitators in a large group explaining the reasons of their visit.

10. Facilitators start group work in separate small groups.

Example - group of officers, group of clerks, group of messengers, group of branch managers, group of society secretaries etc.

11. Facilitators do the following activities in the groups :

a) Stakeholders Analysis

b) Mission Statement

c) STEP - External Environment Scanning

d) SWOT - Internal Environment Scanning

12. The process is repeated in all the groups.

13. Facilitators conduct Semi Structured Interview (SSI) of individual employees and customers.

ODI IN LARGE GROUPS

14. Facilitators meet the large group consisting of representatives of all the earlier groups and a few new employees.

15. Facilitators describe the process and display the data generated about the bank from all the groups.

16. The DAP parameters are displayed and the groups could, if they so desire, discuss various aspects of DAP in their small groups.

17. Facilitators break the large group into smaller groups to discuss on such areas as-Deposits, Advances, Recovery, Human Resources etc.

1.8. The DAP parameters are displayed and the groups could, if they so desire, discuss various aspects of DAP in their small groups.

19. The Groups present their proposal to the large group. The

subjects are discussed and accepted.

20. Log frame is prepared with the large

group of the bank-.

2 I

. Log frame and other issues presented to CEO.

Discussion with Board

22. CEO & Facilitators present the log-frame to the Board. Board modifies the Log frame & accepts.

23. Facilitators assist the Board in preparing a Force Field Analysis

24. Final approved version of Log frame and Force Field Analysis emerges.

General Meeting with all / maximum number of employees

25. Approved Log frame is presented by the CEO to the employees in the presence of the Facilitators. All the employees may attend.

26. CEO requests employees to prepare their Personal Action Plan & Monitoring Committee is created and put in place.

Facilitators return to RO/NBSC

27. Facilitators return with stakeholders analysis, mission statement, STEP, SWOT, Log frame, Force Field Analysis & submit the same to RO/NBSC.

28. Facilitators give a secret note on the sensitive issues.

29. RO takes up the issue with agencies concerned.

ODI - II

30. The ODI - II takes place during the period of 18-20 months

from the ODI-I.

ODI - III

31. ODI III takes place during the period of 37-40 months from the ODI-I.

32. Others Training needs pertaining to skill, banking, attitude, etc. emerging during the ODI process have to be addressed separately.

Annexure-II

Day to day Organisational Development Intervention

On-site - in a DCCB-HO

(Selected Branch Managers and HO Officials)

Ist Day

Facilitators

Meet - CEO

Conduct Atmosphere scanning

Meet people.

2nd - 6 th day

Pre lunch

To conduct Semi Structured Interview of employees.

Post Lunch

Meeting with Individual groups (officers, clerks, peons) for

Stakeholders analysis

Mission Statement Preparation

External Environment Scanning (STEP)

Internal Environment Scanning (SWOT)

Suggested Action Plan for improvement under various areas and strategies.

7th- 9 th day

Joint meeting

Problem and Action Plan to be suggested subject wise, discussed and modified in groups.

Log frame for modified Plans.

Presentation to be made to CEO on last day

.10 th day

Meeting with Board of Directors by facilitators and CEO -

Changes, if any, in the Log frame - Preparation of Force Field

Analysis.

11th day

Meeting with large group -

CE ' 0 to announce the Log frame accepted by the Board.

Thereafter the Personal Action Plans have to be prepared.

Monitoring Committee is formed.

Total duration 11days or 2 weeks.

Note : PACS Secretaries to be called for 2/3 days during pre-lunch.

BMs ODI may be done for 2/3 days, separately.

Formulation of State-wise Reform Package for

Cooperative -Guidelines

1 Although the MoUs of Cooperative Banks including LDBs do contain a package of measures in the form of action points, there are certain broader issues, by and large emanating from these action points only but requiring major policy changes/decisions which have to be dealt with at the highest level in the banks/State Governments/RBI/ Government of India, appropriately but on a separate footing. Formulation of the State-wise Reform Package for Cooperatives, which will eventually lead to the formulation of an all-India Reform Package, is the first step towards this end.

2. The Reform Package should cover all state-specific broader issues of

the above nature, an illustrative list of which is given below.

I. Organisational structure and set up at each level.

ii. Democratisation of Management

iii. Professionalisation of Boards/ Management Committee.

iv. Autonomy of Institutions vis-a-vis control and supervision over them.

v. Leadership/Developmental role of Apex level Cooperative Institutions.

vi. Distinctive roles and responsibilities of Boards/Management Committees

and executives.

vii. HRD including Professionalisation of managerial cadres including CEOs.

viii. Caderisation/decaderisation in PACs/PLDBs/DCCBs.

ix. Constraints in mobilisation of deposits and other resources.

x. Avenues for profitable investment of funds.

xi. Broadening and deepening loan portfolio (including consortium financing and financing outside the cooperative fold).

xii. Recovery strategy - Comparing internal and external factors.

xiii. Costs, income levels and margins (interest rate structure, sharing of margin at different levels, etc.)

xiv. Systems and procedures including MIS for increasing productivity and improving operational efficiency.

xv. System of control and supervision (audit/inspection machinery, etc.).

xvi. Cleansing of balance sheets of credit cooperatives (with stress on internal measures).

xvii. Any other issue having a bearing on organisational strength, financial viability and operational efficiency of the institutions.

3. The Reform Package to be prepared separately for ST structure and LT structure should be presented in a logical sequences, giving issue-wise current status, its impact on credit/flow/viability of the institutions, with supporting data wherever necessary and specific measures for improvement. These measures may be summarised in the action plan to be prepared agency-wise (SCB, SLDB, State Government, etc.).

4. The Reform Package should be based on the recommendations of the state level seminar (to be specially organised for the purpose by the ROs in each state), findings/recommendations of external/internal studies including those envisaged in the MoUs, financial analysis of the performance of cooperatives, papers published by eminent persons/institutions in the field, financial sector reforms introduced/envisaged to be introduced and such other information and data as may be available on the subject.

5. The intention of organising the state level seminars is to get the benefit of the rich experience and expertise of various agencies/institutions in the state connected with credit for agriculture and rural development, in one way or other, in formulation of the Reform Package and to pave the way for validation and acceptance of the Reform Package by all concerned at a later data. The participants of the seminar should, therefore, be of senior level and may be drawn from various agencies/institutions broadly indicated below.

i. State Planning Board.

ii. Senior State Government Officials from Departments of Cooperation, Agriculture, Finance, Institutional Finance, etc.

iii. State level Corporations (hand loom/handicraft development, land development and water resource development, etc.).

iv. Apex Cooperative Banks, other apex level cooperative institutions and lower tier institutions (officials and non officials).

V. Training Centers/ Institutions in the region.

vi. Local Commercial Banks and RRBs.

vii. Reserve Bank of India.

viii. Research Institutions in the region.

ix. Voluntary agencies/NGOs in the region.

x. Eminent persons in the field of agriculture, rural credit and cooperation.

6. In order to ensure that the deliberations at the state level seminars prove to be meaningful and purposeful, it would be necessary for the Regional Office to prepare a 'Discussion Paper' and circulate the same to all the participants of the seminar in advance. In fact, the 'Discussion Paper' would form the basis for formulation of the Reforms Package and as such due care should be taken to prepare the Discussion Paper covering all important issues. Eminent persons in the field may also be requested to present papers in the seminar on important issues.

7. The state level seminar may be organised preferably by the Regional office itself instead of entrusting it to any outside agency. In case, however, it is considered necessary to entrust it to any outside agency of repute, a proposal for funding the cost out of CDF may be forwarded to IDD, HO for consideration, well in time. The date of the seminar may be fixed in consultation with the concerned Executive Director/CGM, IDD, HO/ to facilitate HO participation in the seminar, to the extent possible.

8. Since the findings of the internal/external MoU related studies are also expected to provide firm ground for the Reform Package, every attempt should be made to ensure early completion of such studies and availability of study reports even before holding the state level seminar so as to reinforce the findings and recommendations of the studies by the state level seminar also. However, if on any account, the study reports are likely to be delayed; holding of the state level seminar should not wait for completion of the studies. The findings and recommendations of the study reports when available could be appropriately used in finalising or refining the State Reform Package, at a later date.

9. State Reform Package may be finalised in consultation with the concerned ED and thereafter may be submitted to IDD, HO.

(Ref. HO, circular No. NB.IDD.Coop.27741DAP-29196-97, dated 31.10.1996)

FUNDS MANAGEMENT

The profit of a bank depends primarily on the utilisation of its funds while its ability to meet the demand of its customers is closely related to the reserves it keeps. The success of a bank, therefore, depends on its ability to meet the demands of its customers out of its cash reserves while not making the same unnecessary large.

Minimum Reserve required by Law

Sec. 42 (1) of RBI Act requires all scheduled banks to maintain an average daily balance with the RBI, the amount of which shall not be less than 3.0% of TDL in India, as on last Friday of the second preceding fort- night.

Sec. 18 of BR Act, 1949 requires the maintenance of CRR to the tune of 3.0% of total TDL by the non scheduled banks by way of cash reserve with itself or in C/A with RBI or SCB or by way of net balance in C/A or partly in cash and partly in C/A, as on the last Friday of 2nd preceding fortnight.

Sec. 24 of the BR Act 1949

In addition to CRR, banks are required to maintain in (i) cash (ii) gold or (iii) unencumbered approved securities or a combination thereof, an amount which shall not, at the close of business of any day, be less than 25% of total of its DTL in India.

Maintenance of CRR

Since no income accrues out of the amount maintained under CRR, banks should endeavour to maintain exactly 3.0% so that the statutory obligations are fulfilled while not losing any interest income. With effect from fortnight beginning from 6.5.2000, scheduled SCBs and RRBs need to maintain a minimum level of 65% of CRR requirement only from the first working day of the reporting fortnight, but they are not required to adhere to the 65% stipulation on the last working day of the reporting fortnight, to enable the banks to adjust their cash balance.

For the purpose of maintaining as fine a CRR as possible, the banks may follow the undernoted steps :-

(i) Identify those big branches where there is a large fluctuation of deposit balance and keep a watch on the position on a day to day basis,

(ii) All branches may be advised to inform HO by phone/telegram of large inflow/outflow of deposits beyond a cut off point,

SLR

The SLR portfolio includes non- earning assets like cash and balances in C/A and earning assets like investments in Govt. and other approved securities. In order to optimise the returns, the banks have to: -

(i) minimise the cash/ balances in C/A portion to the extent possible.

(ii) restrict the SLR investments up to 25% or slightly more than that, instead of investing large amounts under SLR and divert the non - SLR funds for investing in more lucrative avenues but within the risk appetite of the bank as indicated in the Investment Policy of the banks.

Monitoring of Surplus funds

(i) To ensure submission of daily statement by branches containing the position of cash and bank balances in C/A. The position needs to be consolidated at HO to find out the position of surplus funds so as to take appropriate decision to use the funds profitably.

(ii) To ensure that the retention limits under cash and C/A are adhered to.

(iii) To monitor the position of CRR and SLR on daily basis at HO .

(iv) To prepare cash flow statements periodically, i.e. fort- nightly/ monthly, so as to have a better idea as to whether there is a Gap or surplus funds are available for investment purposes.

AvenueS for investment of surplus funds

(A) SCBs/CCBs

Avenue for Long Term Resources

(a) Participation in consortium arrangement for procurement of food and other agricultural commodity

(b) Working capital requirement of production and marketing /distribution at national level cooperative / Federation or PSU that are mainly agro-based

(d) Indira Vikas Patra

(e) Unit scheme 1964 of UTI

(f) Bonds issued by PSUs maximum upto 10% of the SCBs/ CCBs deposits after obtaining prior approval of RBI and subject to condition that

i. the bank should have complied with MI / NODC discipline.

ii. no default in repayment of dues to NABARD & in maintenance of CRR/SLR

iii. there should be provisions in the State Act and RCS should have no objection for the purpose

(g) Investment in IDBI equity upto 5 % of their non- SLR funds

(h) Unit schemes 1995 of UTI provided such investments are permissible under Bye- laws etc.

(i) SCBs/ DCCBs can use their own discretion to decide in investing its surplus funds to the extent of 5% of its average surplus , keeping in view the profitability and security of the investments , subject to certain conditions viz. complying with MI/ NODC norms , meeting the credit needs of the cooperatives in the State/ district ,complying with CRR/ SLR requirements,and no default to NABARD

Avenues for Short Term Resources

Short term money market instruments:

Treasury Bills
- Rediscounting of commercial bills
- Participation in call money market
- Certificate of Deposits issued by Scheduled Commercial Banks/ IDBI
- Short term deposits with commercial banks
- Non-permissible avenues
  - Deposits with Public Sector Undertakings, Companies, Corporations, Cooperative Institutions
  - Financial assistance to NBFCs

(B) RRBs (Non-SLR surplus funds)

(i) Shares and Debentures of Corporates and Units of MFs up to 5 % of the incremental deposits at the end of the preceding financial year, including buying shares and debentures from the secondary market.

(ii)No ceiling in regard to investments in bonds of a PSU and All India Financial Institutions( IDBI, ICICI, IFCI, EXIM BANK, NABARD, NHB,UTI, LIC, GIC, DFHI, etc

(iii)Credit portfolios of Sponsor Banks through non-risk sharing participation certificates to be issued by SBs on agreed terms and conditions up to 15% of the fresh lending during the year.

(iv) RRBs can invest in Certificate of Deposits issued by Commercial banks

(v) Shares and debentures of corporate up to 5% of their incremental deposits collected during the previous year.

However, RRBs are to be discouraged from parking their non-SLR funds in fixed deposits of private sector banks. Investments of RRBs in fixed deposits of public

sector banks also should not be encouraged as a rule except as a last resort. Since RRBs are set up primarily to cater to the needs of the rural people with a view to develop rural economy , RRBs should not clamour for more profitable avenues through investment routes but in stead improve their credit portfolio through quality lending.

The investment has to satisfy the exposure limit that the loans granted to a corporate body together with investments should not exceed 20% of the RRBs owned funds or 20% of paid up capital of the company , whichever is lower. However, RBI vide circular dt. 25.09.2000, granted relaxation to the RRBs to extend financial assistance to their borrowers subject to the limit of 20% of their owned funds without reference to borrowing unit's paid-up capital.

For the purpose of calculation of exposure norms, investment made by RRBs in bonds and debentures of Corporates, which are guaranteed by Financial Institutions will be treated as an exposure by the RRB to the FIs to the full extent of the guarantee and not on the corporate.

Share capital deposits are to be treated as a part of Owned Funds for the purpose of arriving at "single exposure norms".

However, while making investments in a company , provisions of Section 19 (2) of the BR Act, 1949 has to be complied with.

Investments

Factors governing investment in banks

i) Safety

ii) Marketability

iii) Stability of price

iv) Income or yield

v) Statutory requirements

Risk factors

Default risk - non receipt of interest in time.
Price risk or market risk. If the interest rate rises, the price of securities falls.
Purchasing power risk - If the rate of inflation is higher then the rate of return, purchasing power is gone.
Political or legal risk - change of Govt. policy may affect investment.
Liquidity/ marketability risk - Same of the securities may not be readily marketable.
Option risk - The corporate may redeem the bonds before the due date.

+------- SLR

Classification of investments |

+------- Non - SLR

SLR Investments

i) GOI Loans

ii) Treasury bills

iii) State Govt. Loans

iv) Central Govt. guaranteed bonds

v) State Govt. guaranteed bonds

vi) Other approved securities

Non- SLR investments

i) Bonds issued by PSU

ii) Units of UTI

iii) Equity shares and debentures

iv) CPs,CDs etc.

Govt. sector is a major borrower in India and Govt. securities include the Central and State Govt. local and municipal bodies and semi- Govt. bodies whose securities are guaranteed by Central and State Governments. The term 'Govt. securities' encompasses all bonds and Treasury Bills issued for the purpose of raising public loans.

Investment Policy

What an investment policy should have?

Objective of the policy
Guidelines on portfolio composition- short/ medium / long term-types of investments
- Delegation of power for investment
- Procedure for investments
- Valuation and other accounting procedures
- Internal control
- Review and reporting
i. Objectives of the policy
- - To meet statutory requirements
  - To manage surplus funds after meeting statutory requirements
  - To maximise investment income within reasonable limits of risks
  - To provide for adequate liquidity
  ii. Guidelines on portfolio composition
  - Diversification
    - Maturity-wise
    - Industry-wise
    - Security- wise
    subject to RBI policy
    - Policy for classification of securities- marking to market
    - Policy for switch deals-selling low YTM securities to buy high YTM securities where depreciation is available for booking losses
    - Exposure limits to various instruments and institutions
    iii. Delegation of power
    - Approval of RCS/ NABARD / RBI
    - Board of Director
    - Investment Committee
    - General Manager, Treasury / Accounts
    - Dealer/ GM/ MD may be delegated power to invest in certain specific instruments
      - Call money could be decided by the Dealer
      - Interbank deposits by GM
      - Other specific investments by CEO
      - Powers should be for specific instruments upto specific amounts
    iv. Procedures for investment transactions v. Internal control ,review & reporting
    - Back office / Front office
    - Reporting to Board
    - Review by Board
    - Reporting to NABARD
    - Audit arrangements
    - vi. Valuation and other accounting procedure
    - vii. Review and reporting
MONEY MARKET INSTRUMENTS

(A) Call, short notice & term money market

Call money market is that part of the national money market where the day to day surplus funds, mostly of banks, are traded in. Call loans represent largely the amount lent to the money market and Discount Houses. This is a telephone market. The call money rates may vary according to the demand and supply of funds in the market. The period of transaction varies from 1 day to 13 days. The call loans are usually unsecured. Players in the call money market are CBs, foreign banks, coop. banks ,primary dealers like Discount & Finance House of India (DFHI), Securities Trading Corporation of India Ltd. (STCI) etc., term lending institutions and specified mutual funds. While banks and DFHI can both lend and borrow, FIs and MFs can only lend. RBI can intervene in the market through DFHI & STCI. Brokers are not permitted in the market. As the loans are highly unsecured ,banks generally fix counterparty limits.

Banks , both commercial and cooperatives, and DFHI & Primary Dealers can borrow and lend among themselves for a period over 14 days and generally upto 90 days on the market-driven rate of interests. Modalities for borrowing is through the current account maintained with RBI. The minimum size of operation for such transaction is Rs. 3.00 crores.

(B) Repo

Repurchase Agreement (Repo) and Reverse Repurchase Agreement (Reverse Repo) refer to a type of transaction in which funds are raised by selling securities and simultaneously agreeing to repurchase the same after a specified time frame , generally at a specified price which includes interest at a rate mutually agreed upon. The transaction is called Repo from the perspective of the seller and Reverse Repo when viewed from the angle of the supplier of funds. The minimum period for which repo can be entered into has been reduced from 3 days to 1 day with effect from 30.10.98. Repo transactions can be done only in respect of TBs and GOI dated securities. However, in the interest of developing the secondary market in PSU bonds and Private Sector Debt Securities and for providing liquidity to such instruments , it has been decided from Oct 97 that ready forward transactions will be permitted in such of the PSU bonds/ private corporate debt securities which are held in the dematerilsed form in a depository and transactions are done in a recognised stock exchange. State Govt. securities are being made eligible for the purpose vide RBI credit policy announced on 11.10.2000.

Transactions can take place among CBs, Coop. banks, RRBs and primary dealers. FIs and certain MFs can participate in both Reverse Repo as well as Repo transaction. The market has been widened with effect from 27.04.2000 to cover all such non-banking entities holding both current and SGL accounts with RBI . These entities can now borrow and lend in the Repo market.

With effect from 05.06.2000, Repo/ Reverse Repo auctions are conducted by RBI on a daily basis except Saturdays with a tenor of one day except on Friday and days preceding the holidays. Interest rates in respect of both repo and reverse repo are decided through cut off rates emerging from auctions conducted by RBI on uniform price basis.

In August 2000, Repo auction of tenors ranging between 3 to 7 days has been introduced.

The Repo is an excellent instrument helping in adjustment in CRR & SLR.

short term Promissory Notes issued by RBI on behalf of GOI, at a discount and fixed period upto one year
risk free
91 days Treasury Bills. Auctioned by RBI on every Friday.
364 day Treasury bills - Auctioned fortnightly on Wednesday preceding the reporting Friday.
14 day Treasure Bills, being auctioned weekly (From May 97)
28 day Treasury Bills (From Oct 97)
182 day TBs have been reintroduced from 9.5. 98 .Auction fortnightly
Issued at a discount and redeemed at face value
Highly liquid
Investment eligible for SLR of the bank.

TBs can be discounted by RBI, DFHI, STCI..

In case of 91 days Treasury Bills, the auction size is fixed i.e. there is a notified ceiling for auction. No such ceiling was there in case of 364 Treasury Bills. However, it has been decided to introduce the practice of notifying the amounts in the case of all the auctions ,including 364 day and 14 day TBs.

At present, the cut off yield in case of dated securities and cut off price in case of the TBs determined coupon rate / price and, accordingly , all bidders at or below the cut off yield/price, are allocated up to the notified amount. With a view to eliminating the WINNER'S CURSE, it was proposed to introduce uniform price auction methods in respect of 91 day TBs auction experimentally.

Non -competitive bids from State Govt. ,Provident Funds, the Nepal Rastriya Bank would henceforth be kept out side the notified amounts.

(D) Commercial Papers

Issued by reputed, well-established corporate bodies for not less than 15 days but not more than one year, to impart flexibility in raising working capital by well- managed companies, at market determined rates.

These are unsecured, negotiable and short term usance promissory notes with fixed maturity.

Minimum size of the issue is of Rs. 5/- lakhs
Issued at discount to the face value.

Can be issued by only those corporate borrowers with a tangible net worth of not less than Rs. 4. 00 crores as per latest Balance Sheet and enjoying working capital limits .
The company should be within top 2 ratings given by CARE/ICRA/ CRISIL.
Only a scheduled bank can act as a issuing and paying agent.
It is not obligatory for banks / FIs to provide stand by facility .

CARE - CREDIT ANALYSIS AND RESEARCH LTD.

ICRA - INVESTMENT INFORMATION AND CREDIT RATING AGENCY
CRISIL - CREDIT RATING INFORMATION SERVICE OF INDIA LTD

(E) Certificate of Deposits

Issued by Scheduled CBs excluding RRBs.

This is a certificate given to the depositors by a bank for funds deposited with its for short term period from 15 days to 1 year.

Issued at a discount to face value.

Issued as a usance pro-note and not a receipt.
Negotiable after 15 days of date of issue. This has, however, been withdrawn by RBI vide its credit policy dated 11.10.2000.

Transferable by endorsement and delivery.

Can not be encashed prematurely but investor can sell the CD in the secondary market
- Minimum size of the issue of CD to a single investor has been reduced from the existing Rs.10 lakhs to Rs. 5 lakhs and in multiples of Rs.1.00 lakhs thereafter.

Banks are permitted to invest in CD of other banks.

(F) INTERBANK PARTICIPATORY CERTIFICATE

The IBPCs are short- term instruments to even-out the short term liquidity within the banking system.

It can be issued by any CBs and can be subscribed to by any CBs and RRBs.

The IBPC is issued against an underlying advance, classified as standard and the aggregate amount of participation in any account should not exceed 40% of the outstanding in the account at any of issue.

The IBPC can be of two types:-

(a) With risk

(b) Without risk

Participation without risk can be issued for a period not exceeding 90 days.

Participation with risk for a period between 91 days and 180 days.

Interest is determined by the market.

The certificates are neither transferable nor prematurely redeemable by the issuing bank.

In case of IBPC with risk, the participating bank would show the aggregate amount of such participation as part of its advance. In case where the risk has materialised, the recoveries have to be shared by both the issuing and participating banks.

In case of without risk IBPC, the issuing bank will show the amount of participation as borrowing from the participating bank.

CAPITAL MARKET INSTRUMENTS

Bonds

Characteristics

i) Pro notes or stock certificate

ii) Fixed income

iii) Maturity is fixed

iv) Coupon rate

Coupon rate

It is the nominal rate fixed and printed on bond certificate i.e. it is the rate of interest fixed on a bond.

Current yield

If you purchase the bond in the secondary market at any other price than face value, the current yield is given by :

Coupon interest rate

Current yield = ------------------------ x 100

Current market price

e.g. Rs.100 bond is purchased for Rs.90/- which is the market price. The bond carries a coupon rate of 10%.

Current yield = ---- x 100 = 11.1%

Yield to maturity

It is the discount rate that equates the present value of a bond's cash flow to the bond's current market price i.e. the rate of return at which the NPV of a bond is equal to zero.

Valuation of the investment

i. PSU Bonds

For unquoted securities, YTM method to be followed.

ii. Shares

a. Value as per stock exchange quotation

b. When not quoted, take the book value as per the latest Balance Sheet

c.If no latest Balance Sheet is available, value @ Rs.1.00 per share.

iii. Shares of PSUs

To be valued at break-up values per previous year's balance Sheet. In case the same is not available, the break up value of earlier year's Balance Sheet to be worked out and reduced by 20 %. If that year's Balance Sheet is also not available, shares to be valued at Rs.1.00 per share.

iv. Debentures

a. As per stock exchange quotation, if available.

b. If not quoted, at carrying cost if interest serviced regularly.

c. If interest not serviced regularly, and is in arrears, depreciation to be made in the same line as sub-standard, doubtful and loss assets.

v. Mutual Fund Units

To be valued based on latest NAV. However, if quoted, market rates to be accepted.

vi. General

Securities to be valued scrip-wise. Depreciation/ appreciation to be done category-wise. Net depreciation, if any, to be provided for in respect of each category separately. Net appreciation to be ignored.

Pricing of bonds

If the market interest rate decreases, the price of bonds increases and it can be sold at premium. If the market interest rate increases, the price of bonds falls and the same may be sold at a discount.

Other instruments of investments

Corporate bodies, Govt. and semi Govt. bodies, PSU, etc. raise fresh capital from capital market. The forms in which these claims are incurred are equity shares, preference shares, debentures, rights, bonus issues etc. The RRBs have since been given freedom to invest in shares and debentures of corporate bodies out of their surplus non SLR funds.

Equity Shares

Ownership capital. Investors have residual claim to the income of the company (equal to profit after tax less preferred dividend).

Rights issues

Offer to the existing share holders in a particular proportion of their existing share holder ship

Preference shares

Category of shares having a preferential right in respect of payment of dividend and repayment of principal. They stand between equity holders and debenture holders in the matter of rights. They are a hybrid category, neither a complete creditor like debenture owners nor owner of the company.

Preference share holders have priority of repayment of principal over equity share holders on the event of winding up of the company. If company is doing well, they are paid their due dividends. However, at the time of adverse conditions, they are treated as owners and no dividend paid.

Debentures

A debenture is a marketable legal contract whereby the company promises to pay the owner of debentures on specified rate of interest for a defined period of time and to repay the principal at the specific date of maturity.

Usually secured by charge on the immovable property.

Types of debentures

i) Non convertible debenture

Can not be converted to equity shares

ii) Convertible debentures

will be converted into equity shares after a specified period of time.

iii) Partly convertible

A portion of which is convertible to equity.

Valuation of investments in non- SLR securities

i. PSU Bonds

As per Stock Exchange quotation , if available. For unquoted securities , YTM method to be followed.

ii. Shares

Value as per Stock Exchange quotation. When not quoted , take the book value as per the latest Balance Sheet. If no latest Balance Sheet is available, @ Rs. 1.00 per share.

Book Value per share: Share holders fund divided by no. of shares

iii. Shares of PSUs

To be valued at the break-up value as per previous years Balance Sheet. In case the same is not available, the break-up value of earlier year Balance Sheeet to be worked out and reduced by 20 % . If that years Balance Sheet is also not available, shares to be valued at Rs.1.00 per share.

Break- up Value: The value of a business on the basis that it will be terminated and the assets sold separately.If a business is successful, its break-up value is likely to be considered less than its value as a going concern basis. Break- up value is useful if a very conservative valuation is required .

iv. Debenture

As per Stock Exchange quotation, if available .If not quoted, at carrying cost if interest is being serviced regularly. If interest is not being seviced regularly and is in arrears, depreciation to be made in the same line as sub- standard, doubtful or loss assets.

v. Mutual Fund Units

To be valued based on latest Net Asset Value (NAV). However, if quoted, market rates to be accepted.

vi. General

Securities to be valued scrip-wise. However, depreciation / appreciation to be done category-wise. Net depreciation , if any, to be provided for in respect of each category separately. Net appreciation to be ignored.

Category refers to :

* Govt. securities

* Other Approved securities

* Shares

* Debentures

* Others

List of Primary Dealers

1. Discount and Finance House of India Ltd. (DFHI)

2. Securities Trading Corporation of India Ltd (STCI)

3. PNB Gilts Ltd

4. Gilt Securities Trading Corporation Ltd

5. SBI gilts Ltd.

6. ICICI Securities & Finance Company Ltd

7. ABN Amro Securities (India) Ltd

8. Ceat Financial Services Ltd

9. J. P. Morgan Securities India Ltd

10. Tata Finance Securities Ltd

11. IDBI Capital Market Services Ltd

12.Kotak Mahindra Capital Company (Unlimited)

13. DSP Merrill Lynch Ltd

14. Deutsche Securities (India) Pvt. Ltd.

15.Corpbank Securities Ltd

Aspects to be looked into while scrutinising the returns and investment portfolio:-

i. Whether bank has formulated an investment policy duly approved by the bank's Board, as per RBI requirement ?

ii. Whether the bank has a high -powered investment committee to review the investments?

iii. Whether investments are made in accordance with the investment policy as approved by the Board?

iv. Whether deviations from the policy are reported to the Board for confirmation?

v. Whether proper investment authority has been vested with the officers by the Board?

vi. Is a half-yearly review done on investment portfolio and placed before the bank's Board and forwarded to RBI/ NABARD ?

vii. What is the position of Govt. and Approved securities vis-a- vis the SLR? If the securities are at too high a level , is it a conscious decision by the bank ?

viii. Is there a panel of approved brokers registered with the recognised stock exchanges prepared with the approval of top management ?

ix. Whether the panel of brokers is reviewed annually?

x. Whether the transactions are routed through the approved brokers only? In case of exception , whether post- facto confirmation is obtained from the competent authority ?

xi. whether brokers are used in interbank transactions other than for purposes for which exemption given ?

xii. Whether the exposure limits in case of company / group of companies exceeded?

xiii. Whether institutions / companies in whose debt instruments the bank has invested have been rated ?

xiv. Whether the all call and put options have been studied properly before investing in debt instruments ?

xv. Whether bank's investments in approved securities are bifurcated into permanent and current categories ? Whether the investments in current category are valued as per RBI norms ?

xvi. Whether all interests receivable have been received in time ? Is there a clear separation of Trading, Settlement, Monitoring, control and accounting ?

xvii. Whether deal slips are serially numbered and monitored and contain requisite data regarding the nature of deals, counterparty, details of security, amount, broker, contract date ,time, etc .?

xiii. Whether counterparty confirmation is received in respect of each deal ?

xix. Whether the bank is a lender or borrower or both in the call money market ?

xx. Whether the bank has over-dependence on a particular counterparty?

xxi. Whether bank has a limit for borrowing or investment in call money market ?

xxii.Whether list of securities approved by RBI is maintained by bank for REPO ?

xxiii. Verification of banks investments with reference to scrips

xxiv. Procedure for purchase and sale of securities

xxv. Adequacy of provision to cover depreciation

xxvi. Investment in shares of other cooperative institutions-Section 19 of BR Act, 1949 (AACS)

xxvii. If securities purchased above par, procedure adopted for writing off of premium .

PRUDENTIAL NORMS-APPLICATION TO VARIOUS BANKS

Why Prudential Norms ?

¥ Balance sheet should reflect a bank's actual financial position.

¥ A proper system for recognition of income, classification of assets and provisioning for bad debts on prudential basis is necessary.

¥ Committee on Financial system (Narasimham Committee) has gone into this aspect and recommended that the income recognition should be objective rather than subjective and based on actual recovery.

¥ Uniform application of the rules.

What are the Prudential Norms?

The Prudential Norms comprise:-

¥ Income Recognition

¥ Assets Classification

¥ Provisioning Norms

¥ Capital Adequacy

Agencies and Applicability of the Norms

¥ All the above four norms are applicable to Commercial Banks, DFIs and Refinancing Institutions.

¥ Only the first three Norms are applicable to RRBs and Cooperative Banks.

¥ The Prudential Norms are not applicable to the PACSs.

Year of Application of the Norms

Commercial Banks 1992-93

All India Term Lending Institutions

(IDBI, ICICI, IFCI, IRBI and EXIM Bank) 1994-95

Refinancing Banks

(NABARD, SIDBI, NHB) 1995-96

Regional Rural Banks 1995-96

Cooperative Banks (ST Structure) 1996-97

Cooperative Banks (LT Structure) 1997-98

CLASSIFICATION OF ADVANCES

Term Loans

¥ Term Loans, Demand Loans, Bridge Loans, Loan Component of CC, Personal loans, Crop loans, Loans against Govt. securities, shares/ debentures, Housing Loans, Educational loans, Staff loans etc. i.e. loans having fixed due dates for repayment.

Cash credit / Overdraft

¥ Cash credit (Hypothecation, Pledge, Clean ) , Overdrafts against Securities/ shares etc. Bills Purchased (BP ) /Bills Discounted (BD )

NON-PERFORMING ASSET (NPA) MEANS

"AN ASSET WHICH CEASES TO GENERATE INCOME FOR A BANK".

Definition:-

¥ A credit facility in respect of which Interest or Installment of principal is past due for any two quarters as on the date of the balance sheet;

¥ As from 31.03.2000, NPA shall be an advance where interest and/ or principal remains overdue for a period of more than 180 days ( past due concept having been dispensed with from that day)

¥ Amount in arrears may either be interest or the principal instalment or both;

PAST DUE

¥ Any due (Interest, Installments of Principal or any other dues ) remaining unpaid for 30 days beyond the due date.

¥ The date of classification of a credit facility into Performing Asset (PA) or Non-Performing Asset (NPA) is the date of the Balance Sheet i.e. 31 March.

¥ Past Due concept has been dispensed with, with effect from 31.03.2001.

FACILITY WISE CRITERIA TO DETERMINE

WHETHER AN ADVANCE IS NPA OR NOT

Term Loans:-

NPA , if interest or instalment remains overdue for 180 days as on the date of the balance sheet.

Agricultural Loans:-

If overdue for two agricultural seasons covering two half years, then NPA.

Allied Agricultural Loans:-

If any amount remains overdue for more than 180 days , then NPA.

Non-Farm sector advances:-

Same as Allied Agricultural advances.

All other Term Loans :-

If any amount due remains unpaid , that is overdue for more than 180 days, then NPA.

Project Loans/ Housing Loans ( Industry and Plantation ) etc:-

Where moratorium or gestation period is given, the loan becomes overdue if installment is not paid on due date. in case of Housing Loans and similar loans given to staff where interest is repayable after recovery of principal, such loan should be classified as overdue if default in repayment of principal on due date.

In case of cooperative banks, overdue criteria will be the basis for classification of assets.

Consortium Advances :-

Consortium advances will be identified as NPA or otherwise as per the behavior of the account in the books of the individual financing bank.

Cash Credit/ Overdraft

A CC or O/D facility is NPA , if it is out of order for a period more than 180 days in the year of reckoning.

What is Out-of-Order ?

If outstanding ,in excess of sanctioned limit or Drawing Power continuously for six months as on the balance sheet date ,

No credits in the Account continuously for last six months as on the date of the balance sheet,

Credits ,if any, are not sufficient to cover the interest debited during the period.

Bills Purchased/ Discounted

¥ BP/BD treated as NPA if remains overdue and unpaid for 2 quarters .

¥ Admissible grace period or Transit/Negotiation period in conformity with established banking practices to be given.

Any other Credit Facility

¥ If any amount to be received in respect of the facility remains overdue for more than 180 days

Multiple Credit facilities:-

* In case of Direct Lending---> If one facility is NPA, all other credit facilities will be NPA.

* In case of On-Lending---> One NPA does not affect others. Each facility to be treated separately according to the behavior in the account.

* In case of SCARDB with federal structure, only that facility which is irregular is to be treated as NPA. All other facilities sanctioned to the same PCARDB should not be classified as NPA.

* In case of PCARDB /SCARDB branch level ,where loans are given to ultimate borrower, all the facilities granted to a borrower will be treated as NPA, even if any one facility becomes NPA.

INCOME RECOGNITION

Income on accrual basis from NPAs not to be taken to Income Account. If taken, matching provision to be made.
Better , if only cash recoveries of interest and other charges are taken to Income Account.

Fees, Commissions etc. to be treated as income in respect of standard assets only.
In case of CBs, RRBs as also the co-operative banks, accounts guaranteed by Central/ State Govts. are to be treated as Standard Assets (non NPA). For the purpose of Income Recognition, interest on accrual basis may be taken subject to matching provision being made in the PL Account.
Loans against FDR / NSCs eligible for surrender / IVP /KVP /LIC policy are exempt from provisioning requirements. Hence no need for making provision. Interest on such advances may be taken to income.
Advances against gold ornaments/ Govt. securities not exempt from provisioning requirements.
As per the normal accounting principle, any recoveries effected in the account will be adjusted first towards other dues, then interest dues and finally towards principal.

ASSET CLASSIFICATION

Assets are classified into 4 categories. They are

¥ Standard Assets

¥ Substandard Assets

¥ Doubtful Assets

¥ Loss Assets

In case of CBs and RRBs asset classification is based generally on NPA criteria.

In case of Cooperative banks, generally overdue criteria is followed for asset classification. However , in respect of CC and O/D facilities where there is no due date, asset classification is done according to the number of years the facility was in NPA categry.

STANDARD ASSETS

Are those accounts which do not disclose any problem and which are not NPA.
In general , all current loans may be treated as Standard Assets.
All loans for agricultural activities may be treated as Standard Assets if repayment period for the same is rescheduled/ rephased, in the event of natural calamity, etc. as per NABARD/ RBI guidelines.

SUB-STANDARD ASSETS

¥ Are those accounts which are identified as NPA for not more than 18 months in case of RRBs.

¥ For Co-operatives, the accounts which are overdue for not exceeding 3 years are classified as Sub-Standard. However , in case of Cash-Credit etc. the accounts which are NPA for not more than 2 years will be classified as Substandard.

¥ If a loan is renegotiated after commencement of production which has the effect of artificially upgrading the status of the credit, such a loan will continue to be treated as Sub-Standard Asset( SSA ) and continue to remain in that category for one year. However, the status of the account may be upgraded after one year, if the account shows satisfactory performance.

DOUBTFUL ASSETS

¥ Are those loans which are NPA exceeding 2 years. ( CCBs )

¥ Are those loans which are NPA for 18 months (RRBs) by 31.03.2000.

¥ Are those loans where installments are overdue for more than 3 years. ( For Co-operatives ) . NPA criteria will follow in case of "no fixed due date loans".

LOSS ASSETS

¥ Are those Accounts which are considered as Loss Assets

¥ by the bank; or

¥ Internal/ External Auditors; or

¥ RBI/NABARD Inspectors

¥ Loss assets as spelt out in case of co-operative banks are , illustratively, those loans/credit facilities in respect of which

Decree or execution petitions time-barred;
Documents lost/ cannot be renewed; no legal proof
Borrower/ sureties insolvent
Borrower not traceable, left the area of operation, died leaving no tangible assets
Fictitious and benami loans
Loans against liquidated societies
Assets financed are totally destroyed and borrower has no other means to repay the loan;
Title to the security is defective and as such cannot be legally proceeded against ;
loan liability is itself disputed;
Loans have become infructuous and subsidies or compensation had not been adequate.
Such accounts where there are potential threat to recovery on erosion in the value of security or non-availability of security and existence of other factors such as frauds committed by borrowers, should be straight away classified as Doubtful Assets or Loss Assets as appropriate, irrespective of the period for which it has remained as NPA .

PROVISIONING NORMS

¥ STANDARD ASSETS

¥ General provision at a minimum rate of 0.25% from the year ending 31.03.2000 (RRBs & Coop. Banks)

¥ SUB-STANDARD ASSETS

¥ General Provisioning of 10 % of the outstanding

¥ DOUBTFUL ASSETS

¥ Provisioning for unsecured portion. Unsecured portion of Doubtful debt is as good as loss asset. Hence 100 % provisioning .

In addition to this;

¥ Provisioning for secured portion of the loan. This depends on no. of years for which the loan is identified as NPA or Overdue. More the number of years as NPA, more is the provisioning required to be made.

¥ Doubtful asset can be classified into 3 categories.

¥ First Category---> Doubtful upto 1 year or NPA between 2 and 3 years or overdue between 3 and 4 years.

Provisioning to the extent of 20 % of the secured portion to be made.

¥ Second Category---> Doubtful between 1 and 3 years or NPA between 3 and 5 years or overdue between 4 and 6 years.

Provisioning to the extent of 30 % of the secured portion to be made.

¥ Third Category --->Doubtful for exceeding 3 years or NPA exceeding 5 years or Overdue exceeding 6 years.

Provisioning to the extent of 50 % of the secured portion .

¥ LOSS ASSETS

¥ To be fully written off or 100 % provisioning required to be made.

Provisioning norms in respect of Govt. guaranteed advances

Provisions to be made in respect of advances guaranteed by State Govt.where guarantee has been invoked and has remained in default for more than two quarters.
.
Advances guaranteed by State Govt. which stood invoked as on 31.03.2000, necessary provision to be made during 31.3.2000 to 31.3.2003 with a minimum of 25% each year.
iii. Advances guaranteed by the State Govt. where guarantee has been invoked on or after 1.4.2000 and has remained in default for two quarters , should be classified as NPA and should be fully provided for (100%) from the year ended 31.03.2001.

Provisioning -Certain clarifications

i. The amount to the extent guaranteed by DICGC should be deducted from the total loans and advances and provisions to be made in respect of balance amount only.

ii. The interest amount should be deducted from the advance before classification of advances itself. Provision to be made only on balance amount. (RRBs)

SOME RELAXATIONS

¥ In case of co-operatives, all agricultural loans are considered as fully secured as the same are disbursed against charge on land as provided in the respective State Cooperative Societies Acts/Rules.

¥ Liabilities towards PF and Gratuity to be estimated on actuarial basis and fully provided for.

TREATMENT FOR INVESTMENTS

¥ All SLR investments are required to be categorised as permanent and current investments. Permanent investments are those investments which are held by the bank upto maturity.

¥ Not more than 70 % in permanent category. Proportion between Permanent and Current investments is being stipulated by RBI .

¥ No provision required to be made in respect of permanent investments which are held by the banks upto maturity.

¥ For current investments, valuation to be made at lower of the cost or market price as on 31st March. Depreciation to be provided for the current investments However, while for cooperative banks , such stipulation is not applicable for the time being, RRBs have been exempted from this upto a period ending 31.3.2002.( Vide RBI circular dated 26.5.2000 addressed to all SBs) .

¥ Valuation of securities

¥ For Govt.. securities where quotations are not available, the RBI has specified yield to maturities ranging from 1 to 10 years. In case of State Govt.. securities and other Govt.. guaranteed securities, the yield to be used is YTM plus 0.25%.

¥ As regard other unquoted securities including PSU bonds, banks should uniformly follow YTM method for arriving at valuation of unquoted securities.

¥ Valuation of shares:-

¥ Valued at market prices whenever stock exchange quotations are available.

¥ Where current quotations are not available, valuing to be based on the book value as per latest balance sheet.

¥ If latest balance sheet is not available, shares are to be valued at Re 1/-

¥ Valuation of Debentures

i. To be valued on the basis of Stock Exchange quotation where available

ii. If the current quotations are not available, at carrying cost (i.e. book value) if interest is serviced regularly

iii. If interest is not serviced regularly , and is in arrears, the depreciation to be made in the same lines as advances classified as substandard, doubtful etc.

Mutual Funds

To be valued based on latest NAV in respect of each particular scheme. However, if market rates are available as per Stock Exchange quotation, market rates to be adopted.

Valuation of PSU shares:-

¥ They may be valued at the break-up value as per the balance sheet date.

¥ If B/S for current year is not available, the break-up value should be worked out as per the previous year B/S and it should be discounted by 20 %.

¥ If this is also not available , the share must be valued at Re1/-

Valuation of Coop. shares

¥ Investments in shares of cooperative institutions to be valued at carrying cost price.

¥ If State Cooperative Acts/Rules more stringent, those to be followed.

Securities under each category shall be valued scrip-wise. Depreciation/ appreciation to be aggregated category-wise i.e. Govt. securities, Other approved securities, shares, debentures and bonds, and others. Net depreciation ,if any, shall be provided for. Net appreciation to be ignored. Net depreciation required to be provided for in any one category should not be reduced on account of net appreciation in any other category.

PHASING OF PROVISIONING

¥ RRBs were required to operationalise the Income Recognition and Assets Classification norms from the year 1995-96. Provisioning Norm is followed from 1996-97.

¥ In case of co-operatives (short term) they have to operationalise the Income Recognition, Assets Classification and Provisioning Norms from the year 1996-97 onwards. To enable them to cope up with the provisioning requirements, a two years' phasing was originally allowed to them as under:-

¥ In the first year i.e. 1996-97, the co-operatives will have to make provision to the extent of 100 % for loss assets; and not less than 30 % provision to be made against their Substandard and Doubtful assets.

¥ In the Second year i.e. 1997-98, the co-operatives were required to make full provisioning.

In order to give more time to cooperative banks to adjust themselves to the new system, RBI vide its circular dated 2.7.98 allowed the Coop. banks (Short Term) to create the required provisions within 4 years starting from 1996-97 and ending by 1999-2000.

In case of Land Development Banks, they were required to make full provisioning from 1997-98. However, keeping in view the relaxations given to short term wing by RBI; NABARD , in consultation with RBI, decided to permit SCARDBs to phase out the provisions required to be made upto the financial year 1999-2000, as under:

1997-98

i)100 % in respect of loss assets and 30 % of the provisioning required in respect of sub standard and doubtful assets.

1998-99

ii) 100 % in respect of loss assets and 35 % of the residual amount of sub standard and doubtful assets together with current provision required in respect of such assets in the second year.

1999-2000

iii) 100 % of loss assets and 35 % of residual amount of sub standard and doubtful assets together with current provision required in respect of such assets classified in the third year.

Clarifications in respect of NPA provisions

No objection to writing back excess provision against NPAs to Profit & Loss account by banks.
Balance available in risk funds should not be adjusted against provision for NPAs in case of RRBs.

Setting up of Business Development Department (BDD) in Cooperative Banks

NABARD has been initiating various measures for the institutional strengthening of the Cooperative credit institutions particularly the SCBs, DCCBs and SCARDBS. The initiatives include, inter-alia, provision of grant assistance to these institutions for setting up of different Cells like TME(FS/NFS), IDC (Financial Analyst) etc. Operationally, the sanction and monitoring of these Cells/specialists is undertaken by different Departments at the Head Office of NABARD. With a view to having better coordination on policy and approach together with monitoring of' these Cells, HO has merged these Cells viz. TME, (FS), TME (NFS) and Institutional Development Cell sanctioned to these banks to, form a unified Business Development Department (BDD). The broad objectives of BDDs would be to identify credit potential for Farm and Non-Farm business of the individual cooperatives, prepare action plan for implementations, review and monitor it, prepare product/project profiles for major activities suited to local conditions both within Farm and Non Farm Sectors, appraise, monitor and evaluate the projects, improve quality of lending and take all such steps necessary and incidental to these activities including up scaling of credit flow to tile above projects.

Salient features of the Scheme of Business Development Department (BDD) in SCBs/SCARDBs

1. Name : The TME (FS & NFS) Cell, Institutional Development Cell (IDC) shall be merged into Business Development Department (BDD) which shall cover both Farm and Non-Farm Sectors.

2 Constitution : The SCBs/SCARDBS willing to avail of the assistance under the scheme will have to convert their planning Departments into business Development Department This Department will be headed by one-of the senior most officers of the bank, Additional support in the form of Financial Analyst and technical experts will be provided to the department as laid down in the following paragraphs.

3. Objectives : The broad objectives of BDDs would be to identify credit potential for Farm and Non-Farm business of the banks, prepare action plan for implementation, review monitor it, prepare product/project profiles for major activities suited to local conditions both within Farm and Non-Farm sectors with due emphasis on emerging sub-sectors, appraise, monitor and evaluate the projects, improve quality lending and take all steps necessary and incidental to including upscaling of credit flow to the above projects.

4. Eligible Banks : Only weak SCBs and SCARDBs or SCBs/SCARDBs having large number of affiliated DCCBs/PCARDBs in the weak category shall be the eligible banks for assistance under the scheme. The Setting up of Business Development Department (BDD) in Cooperative Banks is being done in Phases .

5. Functions of BDDs: A job chart indicating the broad functions to be undertaken by the personnel of' BDDs is given hereunder.

i) Identification of the weak affiliates, come out with diagnosis, solutions, negotiate with their management on implementation of the solutions, which will get imbibed in the DAP/ MoU of concerned affiliates.

ii) Identification of potential activities / areas for promotion of business activities within the jurisdiction of the bank.

iii) Preparation of bank's perspective plan for 5 to 10 years for exploitation of the potential - Development of various potential/emerging sub-sectors- diversification of lending portfolio of the bank in Farm and Non-Farm Sectors, development of cluster approach and ancilliarisation

iv) Formulation of locally suitable bankable schemes to facilitate credit support to the prospective borrowers.

v) Accelerating the business of the baiik - Monitoring and evaluation of lending - Mid-term corrections - Rationalisation of policy and procedures in the bank for smooth credit flow - Quantitative and qualitative Improvement in lending.

vil Taking steps for improving recovery performance of the bank in lending- Maintenance of separate DCB for Farm and Non-Farm Sectors.

vii) Preparation of project profiles on predominant/potential activities- Dissemination of information on various tecno-economic aspects of various activities among tile branches and the prospective borrowers - Providing suitable guidance, motivation and orientation to the Branch Managers for their greater participation.

viii) Developing data base for the bank's lending portfolio - Providing information/data/feedback to the top management of the bank/sponsor bank/higher financing agencies as also to the NABARD, DDM/RO/HO periodicallv - Submission of prescribed returns to NABARD - RO/HO.

ix) Acting as a resource person for various training programmes conducted by the bank-looking after the skill upgradation and capacity building of the officers of the bank for handling business portfolio through training / exposures.

x) Coordinating with NABARD DDM/RO - Associating with NABARD's promotional projects in operation in the district. Implementing DRIP Action Plan pertaining to the bank.

xi) Networking with Voluntary agencies/NGOs for introducing supplementary credit deliver), channels.

xii) Identification of prospective beneficiaries/entrepreneurs - Dissemination of information/ inputs on lending among them.

xiii) Coordinating with the concerned State Government Departments/ functionaries as well as the developmental agencies for provision of various linkages, viz., technology, marketing support and other infrastructural facilities for the successful implementation of various projects financed by the banks.

xiv) Creating necessary awareness and appreciation of business in the district.

xv) Giving an overall leadership and playing a key role in the furtherance of Farm and Non- Farm Sectors under the aegis of the bank.

xvi) Proper maintenance of all records pertaining to DAPs and MoU.

xvii) Financial analysis of the operations of concerned institutions for appropriate financial management decisions.

Xviii) Giving advice to the Board of the bank, on matters relating to deployment of surplus funds so as to maximise profits.

xix) Annual review and revision of financial parameters projected in the DAPs and MoU.

xx) Compilation of data/information relating to the implementation of DAPs and MoU on quarterly, half yearly and yearly basis.

xxi) To prepare analytical notes on quarterly basis, based on the data/information compiled and furnish the same to bank's Board, Monitoring and Review Committee, State Govt. and NABARD.

xxii) Drawing up of the agenda, covering the quarterly meetings of the Monitoring & Review Committees, preparing the proceedings of the meetings and forwarding the same to all concerned.

xxiii) Follow-up of action on decisions taken by the monitoring & Review Committee. Preparation of the State focus paper on the status of implementation of DAPs and MoU, highlighting the issues requiring attention of other agencies such as State Government, GOI, RBI, NABARD, etc.

(The List is illustrative and Not exhaustive)

NABARD may arrange for training/skill upgradation of the personnel of BDDs. The BDDs at SCBs/SCARDBs will cater to the needs of DCCBs/PCARDBs by extending technical support required by them. If necessary, BDDs will be allowed to have extended arms/ select personnel at DCCBs / PCARDBs level.

6. Number of personnel: NABARD assistance to the banks for BDDs shall normally be limited to 4 persons in respect of SCBs having a 3 tier structure and 2 persons in respect of SCARDBs and SCBs having a 2 tier structure. The appointment of personnel will be as given overleaf.

(i) Credit Expert/Investment/Fund Management Analyst

(ii) Project Specialist

(iii) Technical Expert (FS)

(iv) Technical Expert (NFS)

Normally, SCBs should be in a position, to provide requisite technical support to their DCCBS. However, BDDs in SCBs could be suitably strengthened to provide such technical support to DCCBs depending upon the number of DCCBs in the state, size of business, scope of Farm/Non-Farm activities as projected in PLP/ DAP/MoU, etc., on a case to case basis.

7. Qualification/ Experience of the Personnel :

a) Credit Expert/ Investment/ Funds management Analyst: Should be MBA/CA with at least 3 to 5 years experience in dealing with rural credit projects. He will make Financial Analysis of the operations of the bank/s and give expert advice to the Board of the bank on matters relating to funds management including gainful deployment of surplus funds to maximise banks' profits. He will also make annual review for revision of financial parameters projected in DAPs and MoU and will attend to all other matters related with DAPs/MoU.

b) Project Specialist: Should be a post Graduate in Economics/Commerce/ CA/MBA with atleast 3 to 5 years' experience in rural projects formulation; appraisal, monitoring and evaluation; He will identify potential activities/areas for promotion of business and prepare banks' perspective plan for 5 to 10 years for planned exploitation of the potential. He will also prepare project profiles on predominant/potential activities, formulate locally suitable bankable schemes to facilitate support to the prospective borrowers and also disseminate information on various techno-economic aspects of various activities among the branches and prospective borrowers.

c) (i) Technical Expert (FS): Should have technical qualification in B.Sc./ M.Sc Agriculture or other relevant Farm Sector technical discipline with experience of 2/3 years

(ii) Technical Expert ( NFS) : Should have technical qualification in Agro-based Engineering or other relevant Non-farm technical disciplines experience of 2/3 years

The technical experts (FS) and (NFS) will work in close coordination with the credit/ project specialist and will assist them in bringing all round development in the State.

8. Quantum and rate of NABARD Assistance:

(i) Salary reimbursement : Rs-1-80 lakh per person p.a. in respect of Credit Specialist/Investment/Funds Management Analyst and Project Specialist and Rs-1-44 lakh per person p.a. in respect of Technical Expert (FS) and (NF.S).

(ii) Cost of Supporting Staff : Upto 10% of the salary of the Cell personnel.

(iii) One time grant for purchase of PC and Printer : Rs. 60,000/- per bank.

(iv) NABARD assistance shall be an additionality i.e. not to cover the salary of the existing staff.

(v) Total assistance in various forms for a BDD will be restricted to a maximum of Rs. 10.00 lakh per annum / per bank.

9. Rate of Assistance : With a view to seeking bank's involvement in the proposed BDDs, NABARD will meet only 90% of the assistance and the balanced 10% or amount in excess of ceiling prescribed at 8.(i) above whichever is higher evil be contributed by the bank concerned.

10. Period of Assistance : Period of assistance shall be kept uniformly at 5 years (extendable to another 3 years selectively). The Board of Directors of the concerned bank will have to pass the resolution, undertaking to continued the Department even after the discontinuance of assistance from NABARD. The existing cells, after merger into BDDs, will be treated as fresh and will receive assistance for 5 years from the date of merger.

11. Computation of period of assistance: The computation of year for the purpose of reimbursement of salary shall be the financial year (April-March). Where the operational period is less than one year, proportionate reimbursement would be made.

12. Support to deputationists: The banks will recruit suitable persons for the BDDs. Prior approval of NABARD shall, however, be necessary for all persons to be appointed in the Department.

13. Reimbursement of Claims: The reimbursement of claims to the banks will be made by NABARD ROs on quarterly basis. The claims should, however, be preferred by the banks to the ROs within 30 days of the end of the quarter.

14. Nodal Department in NABARD: IDD shall be the nodal department both at HO and RO levels for handling the work relating to establishment and monitoring,, of the BDDs. A Business Development Cell (BDC) will be set up in IDD to coordinate and monitor BDDs of SCBs/SCARDBs.

15. Source of funding the BDDs : The assistance to cooperative banks for establishment/maintenance of BDDs will be funded out of the Cooperative Development Fund.

16. Monitoring Proformae / Progress report: The banks shall submit to ROs quarterly progress reports along with their claims for reimbursement as per the formats prescribed by NABARD, a copy each of which may be endorsed to IDD, NABARD, Head Office. The claims will be settled by ROs only if they are accompanied by the progress reports, Ill addition, a special annual progress report shall be submitted by the banks.

Consequent on introduction of BDD scheme, no new/fresh TNE (FS/NFS) Cells and ID Cells will be sanctioned to SCB/SCARDBs and DCCBS. However, the present ongoing cells which cannot be taken up for merger based on the criteria indicated in paragraph 3 above, may continue till the expiry of their tenure and no extension beyond the period will be considered.

Setting up of Business Development Department (BDD) in Cooperative Banks- Role of ROs

Identification of weak banks : The weak SCBs and SCARDBS, or the SCBs/SCARDBs having a large number of weak DCCBs/PCARDBs, have since been identified as per details furnished below. These banks will be eligible for assistance under BDD scheme in the first phase. The selection of these banks has been made keeping in view broadly. the criteria such as erosion of their owned funds as well as the ratings under CAMELSC Model assessed by NABARD. In states where there are a large number of DCCBs/PCARDBs in weak category, the BDD at the apex level should utilise the services of specialists in the business development of those DCCBs/ PCARDBS. In the case of precariously weak DCCBs/PCARDBs, the SCB/SCARDB may consider putting in position a small 'Business Development Cell', which would function as an extended arm of the BDD at the apex level. The BDD scheme should be viewed as an incentive to banks to further take their own initiatives to improve the business performance and operational efficiency.

List of identified weak SCBs/SCARDBs or SCBs/SCARDBs

having a large number of weak affiliated DCCBs PCARDBs

State Cooperative Banks

State Cooperative Agriculture and Rural Development Banks

I . Andhra Pradesh

I . Haryana

2. Bihar

2. Himachal Pradesh

3. Gujarat

3. Karnataka

4. Himachal Pradesh

4. Kerala

5. Karnataka

5. Madhya Pradesh

6. Madhya Pradesh

6. Rajasthan

7. Orissa

7. Tam7ilnadu

8. Rajasthan

8. West Bengal

9. Tamlinadu

10. Uttar Pradesh

11. West Bengal

The identified banks have been advised to forward their proposals for establishment of BDD, through the Regional Offices in the States concerned, for onward transmission to HO for consideration and sanction on merits. At the RO the Section / Division handling institutional development will be the nodal Section/ Division for BDDs. The role of ROs in this regard will briefly be as given overleaf.

a) The applications for establishment of' BDDs shall be submitted by banks to the ROs concerned. The RO shall scrutinise the same and forward it to HO along with its scrutiny note and specific recommendations. For this purpose HO have prescribed a check list which is given below.

b) After sanction o f the BDD by HO the ROs shall monitor BDDs' performance through quarterly reports furnished by banks with the help of DDMs/DDOs.

c) The claims of the banks will be settled by ROs. as per their (banks) eligibility.

d) The expenditure on BDDs will be advised by the RO to IDD, Ho periodically (quarterly and annually).

e) The Ros will have to hold quarterly meetings with the BDD personnel and report progress / outcome to HO.

Check-list for Regional Offices for scrutinising applications of SCBS/SCARDBs

for establishment of the Business Development Department in such banks

1. Performance of the bank

The Regional Office may verify the information furnished by the bank in the application in regard to its lending performance. Whether the growth rate in the past disbursements and other factors justify the perspective plan drawn by the bank both for FS and NFS ? Is the prospect/ potential in the district/area, as per potential-linked credit plan ? Whether Non-IRDP(SGSY) portfolio of the bank includes any project finance other than ARF ? The Regional Office may comment on completeness/correctness of the information submitted by the bank in this regard and if necessary, supplement the information from the available records in RO, particularly regarding the present level of bank's business, potential for development by the bank in future, and the refinance assistance drawn by the bank. The RO should also comment on the recovery performance of the bank (both FS and NFS), future projections, projected incremental income out of the Division's operations and implementation of DAP/MoU by the bank.

2. Personnel

i) Qualification and experience : RO may have to comment on the nature of academic qualifications possessed and how far the qualifications are relevant to the business development, as also what special experiences have been acquired by the officers justifying his/their appointment ? The RO may have to specify / elaborate in concrete terms, about the experience gained by the- particular officer while recommending his/her case to HO. For personnel appointed on deputation, the RO may have to ensure that the bank gives an undertaking that the services of the deputationist will be available to the bank for at least three years.

ii) Training : The 'personnel' should have undergone training in RDPC in -CAB, Pune/BIRD, Lucknow/ RTC, Bolpur/Mangalore. If the officer has not undergone training, bank can arrange to send him for training to any of the Training Institutes at the earliest after his/her appointment in the Department. Prior training should not be a precondition for appointment and the bank can give an undertaking to arrange for such training as soon as possible after the appointment of the person. Training in Farm and Non-Farm disciplines in CAB, Pune/BlRD, Lucknow,/ NIRD, Hyderabad, etc., may be considered as an added qualification for the purpose.

3. Number of persons in a Department : The number of persons recommended should justify the existing business as also perspective plan and potential for future development worked out on a realistic basis and nature of financing activities Ordinarily,, the number of such persons may be recommended keeping in view the following broad norms:

For SCBs : In case of SCBS, the number of Technical Officers should be decided in the overall context of number of DCCBs affiliated to the bank, the availability of technical officers in DCCBS, existing volume and nature of business and potential for business in future. Additional persons could be considered on the basis of volume of business and the growth rate and diversification in the lending portfolio of the bank and the bank's ability to bear the cost of personnel after 5 years when the assistance from NABARD will normally cease.

4. Returns/ Documents

The following documents/returns should be checked/ensured

a) Whether a Board resolution of the concerned bank has been obtained and is in order ? The Board of the bank should resolve to avail the assistance from NABARD for setting up of Business Development Department with appropriate persons identified for 5 years. The Board should also resolve that after the expiry of 5 years when NABARD's assistance ceases, the bank would continue the Department at its own cost. .

b) Whether bank has given an undertaking to depute the 'personnel' for RDPC training in due course, in case the officer has not already, undergone the training?

c) Whether the bank has Undertaken to inform NABARD immediately in the event of change/ discontinuance of the persons identified?

d) Whether the bank has' submitted (in case of proposal for additional persons) necessary information in the annual statement prescribed?

e) Whether the bank had sought for reimbursement of necessary expenditure within 30 days after expiry, of the quarter to which it relates in the past ?

5. Miscellaneous Aspects : Any other details in support of BDD persons to be constituted/appointed (e.g.initiative taken by the bank in developiiig cluster approach in lending, formulating/appraising new and innovative schemes, organising traming of artisans/seminar or workshops on NFS, complying with the deficiencies pointed out in the utilisation studies./project audit/DDM studies/special studies etc.) may be cited.

Sr.No.	Particulars	Projections for the previous year (2000-0 1)	Actuals for the previous year (2000-01)	Projections for the current year (2001-02)	Projected growth rate (%) in respect of business levels for the current years (2001-02)
1	2	3	4	5	6

State Cooperative Banks	State Cooperative Agriculture and Rural Development Banks
I . Andhra Pradesh	I . Haryana
2. Bihar	2. Himachal Pradesh
3. Gujarat	3. Karnataka
4. Himachal Pradesh	4. Kerala
5. Karnataka	5. Madhya Pradesh
6. Madhya Pradesh	6. Rajasthan
7. Orissa	7. Tam7ilnadu
8. Rajasthan	8. West Bengal
9. Tamlinadu
10. Uttar Pradesh
11. West Bengal