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Friday 18 March 2011

Co-operative banks and their rural credit

Co-operative banks and their rural credit

Introduction

       Cooperative banking is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world. A co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank. Co-operative banks are often created by persons belonging to the same local or professional community or sharing a common interest. Co-operative banks generally provide their members with a wide range of banking and financial services (loans, deposits, banking accounts…).

Co-operative banking

            Co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank. Co-operative banks are often created by persons belonging to the same local or professional community or sharing a common interest. Co-operative banks differ from stockholder banks by their organization, their goals, their values and their governance. In most countries, they are supervised and controlled by banking authorities and have to respect prudential banking regulations, which put them at a level playing field with stockholder banks. Depending on countries, this control and supervision can be implemented directly by state entities or delegated to a co-operative federation or central body.

co-operative banks common features:

• Customer-owned entities: in a co-operative bank, the needs of the customers meet the needs of the owners, as co-operative bank members are both. As a consequence, the first aim of a co-operative bank is not to maximize profit but to provide the best possible products and services to its members. Some co-operative banks only operate with their members but most of them also admit non-member clients to benefit from their banking and financial services.
• Democratic member control: co-operative banks are owned and controlled by their members, who democratically elect the board of directors. Members usually have equal voting rights, according to the co-operative principle of “one person, one vote”.
• Profit allocation: in a co-operative bank, a significant part of the yearly profit, benefits or surplus is usually allocated to constitute reserves. A part of this profit can also be distributed to the co-operative members, with legal or statutory limitations in most cases. Profit is usually allocated to members either through a patronage dividend, which is related to the use of the co-operative’s products and services by each member, or through an interest or a dividend, which is related to the number of shares subscribed by each member.

Rural Credit Cooperatives in India

                                                                          Rural Credit Cooperatives have existed in India for a long time. A shortage of supply of rural credit was prevalent in India. To meet the demand for short and long term rural credit the Co-operative Credit Structure (CCS) was set up. While short term credit is supplied by the State Cooperative Banks (SCB), District Central Cooperative Banks (DCCB) and Primary Agricultural Credit Societies (PACS), long term credit is supplied by the Primary Cooperative Agriculture and Rural Development Banks (PCARDB).

                                                                               Rural Credit Cooperatives were initiated in India long back, some of them, even before India's Independence in 1947. Post-independence the rural credit cooperative system was developed further. Moreover rural banks were set up. However in spite of such initiatives credit needs of the rural Indian people have not been met effectively. Supply of credit for agriculture too has not matched up to the demand levels.

The resultant effect has been widespread discontent and despair among the rural poor, sometimes leading to extreme actions like suicides by farmers. Measures were undertaken by the Indian government in 2004, to increase credit supply for agriculture by commercial banks. Moreover banks were also asked to re-organize repayment schedules of farmers who were affected by floods, droughts, etc.

                                                            According to World Bank estimates of 1994 and 1995; the average credit utilization was Rs 14,549 per family in a year. While 65% of rural credit in India was utilized for productive purposes, the remaining 35 % was utilized for consumption purposes. Out of the 65% utilization for productive purposes, short term utilization constituted 49%. Long term utilization (purchase of agricultural machinery, livestock) etc accounted for a mere 16%. Short term consumption (for purchase of consumer durables, clothes, etc) was 20% while long term consumption (for house building, marriage, etc.) was 15%.

The Co-operative Credit Structure (CCS) of India was set up to serve the needs of both short term and long term rural credit in India. Short term credit is supplied in rural India by three institutions -
  • State Cooperative Banks (SCB)
  • District Central Cooperative Banks (DCCB)
  • Primary Agricultural Credit Societies (PACS)
                                                                                Long term credit is supplied by the Primary Cooperative Agriculture and Rural Development Banks (PCARDB).
In 2007, the World Bank has approved a project related to rural credit cooperatives in India. This project entitled "The Strengthening Rural Credit Cooperatives Project" involves a total cost of an estimated 600 million US dollars and is expected to be completed by June 2012. The National Bank for Agriculture and Rural Development (NABARD) will be implementing the project

Conclusion


                    The origins of the cooperative banking movement in India can be traced to the close of nineteenth century when, inspired by the success of the experiments related to the cooperative movement in Britain and the cooperative credit movement in Germany, such societies were set up in India. Cooperative banks are an important constituent of the Indian financial system. They are the primary financiers of agricultural activities, some small-scale industries and self-employed workers. The Anyonya Co-operative Bank in India is considered to have been the first cooperative bank in Asia. Though registered under the Co-operative Societies Act of the Respective States (where formed originally) the banking related activities of the co-operative banks are also regulated by the Reserve Bank of India. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.



CHARACTERISTIC OF THE STATE

CHARACTERISTIC OF THE STATE

The State as an institution came into existence as part of a historical process. In the
third world, decolonization shaped the state, giving it specific characteristics. The? Boundaries existing at the time of colonization were modified in some cases; in other
Cases entirely new states were carved out. The temporal boundaries of the state did not
always coincide with the Nation; that is, often people belonging to different ethnic
groups, nationalities were brought together and the boundaries of the colonies were
traced, delimited according to the needs of the colonial powers. African states are the
best examples to indicate the armciality of the state. Nigeria for example was entirely a
British creation. The Third World States became states before they became nations. This,
is to a large extent, is responsible for territorial conflicts and for problem of national
integration. A number of Third World Counuies face ethnic and secessionist movements
in the post-colonial era. British colonial policies and the dynamics of nationalist
movements led to the creation of Pakistan's secessionist movement which is turn led to
the creation of Bangladesh. The d ~ c i a l i t y of the colonial boundaries, the impact of
colonial legacy and the dynamics of decolonization processes explain the complexity of
the Third World State.
The third world state has the following distinct features.
1. It is an over developed state;
2. It enjoys autonomy from the dominant classes;
3. It protects the interests of the metropolitan bourgeoisie &so.
An 'Over-developed State'
In the Western capitalist countries the modem nation-state has emerged due to internal
dynamics of society. It cam into being in the course of a historical transition to
capitalism. The rising capitalist class took the initiative to establish a nation-state.
In the third world the motive force for change in the political institutions came from
outside. During the colonial period the third world was dominated by the western
capitalist countries. The colonial rulers had created political institutions in their own
image to facilitate domination over the native classes and economic exploitation of the
colonies.
To perform these functions the colonial rulers have related an elaborated legal-institu-
tional structure to control the colonies. The many and the bureaucracy who manned
these institutions played a vital role in managing the affairs of the colonial rulers.
Even after independence the elaborate structure remained in existence. There are two
salient features of this state: one, that it is not formed by the local classes nor is it
established as a consequence of social change, two, the native ruling classes had no
control over the state.
Emergence of theThird World
The state is far ahead of the time and space in which it is located. In the third world
counmes therefore bureaucracy and the army have acquired a central place. In the
western capitalist countries the bureaucracy plays an auxiliary role. It is an instrument of
the dominant class, whereas in the third world it has a central place and it enjoys
autonomy from the dominant classes.
An over developed state weakens democratic institutions. Even in those third world
countries where democratic institutions exist and the elected representatives control the
state agencies, bureaucracy retains its domination over the state. However it exercises
control in league with politicians. ,
In counuies having democratic control politicians occupy central place. Politicians
articulate the demands of the people to cultivate support. They formulate policies to
fulfill the demands of the people. In this process politicians provide legitimacy to the
political institutions. However, the power is hemmed in by bureaucratic procedures and
controls. Politicians are converted into brokers between the state and the people.
12.3.2 Autonomy
The western countries are domina~cd by a single well-formed dominant class. In all the
western countries the capitalist class is the dominant class. The third world is marked by
the existence of multiple dominant classes. The landlord class, i.e. local bourgeoisie of
the metropolis control the third world. An alliance consisting of all these classes
dominates the state. The alliance is called historic bloc. The historic bloc arises because
the social formation in third world consists of elements from both capitalist as well as
precapitalist social relations. The capitalist class is weak and incapable of fighting
against the pre-capitalist relations in society.
The capitalist class is weak because it exercises limited control over the economic
activity. A large part of the economic production is controlled either by the metropoli-
tan bourgeoisie or by the local landed gentry. No class is enough strong to exercise
contrdl over the state.
Since there is no single dominant class, the slate acquires the autonomy to regulate the
relationship between different classes of the historic bloc. The third world state, by
deploying vast economic resources to reproduce capitalist production pmess in the
interest of local dominant classes and the bourgeoisie of the metropolis, sustains its
Autonomy.
12.3.3 Control of the Metropolis
The third world state is subjected' to control by extraneous forces. The under-developed
nature of the economy and the nature of the ruling elitelclasses renders the state
dependent on foreign aid and capital. The ruling elite by acting as mediators between
the sfate and the external capital amass profits. This process does not help developmerit.
The gap between the ruled and the rulers and between the rich and the poor widens. It
is fanfetched to argue that €he third world state is completely under the control of
imperialist rulers. Independence from colonial domination has eliminated the scope for
the bourgeoisie of the imperialist powers to exercise direct control over the third world
state. However it influences the third world state indirectly. The over-developed third
world state by dissolving the national boundaries, creates favourable conditions for the
world market to penetrate into the third world. The state by facilitating the induction of
technology and investment brings about the integration of the third world into the
global market. The state, the ruling elite, negotiate with C.e external world with
dimirgishing power and ability to do so.

PROGRESS OF BANKING IN INDIA AFTER NATIONALIZATION (1969)

Progress of Banking in India after nationalization (1969)

Introduction
After nationalization, the breath and scope of the Indian banking sector expanded at a rate perhaps unmatched by any other country. Indian banking has been remarkably successful at achieving mass participation. Between the time of 1969 nationalization and the present over 58,000 bank branches were opened in India. There new branches as of March 2003, had mobilized over 9 trillion Rupees in deposits; which represents; which represents the over whelming majority of deposits in Indian banks.
Before And After Nationalization
Development of banking in India came into its stride in the 60’s. Bank deposits began to increase much faster than national income. The ratio of bank deposits to national income rose from 14.7 in 1960 to 16.6 in 1969. This relatively faster growth of deposits was due to three factor mainly.
·        Spread of banking habit
·        Expansion of branch network which provided a service many centers which were earlier unbanked, and
·         Increase in Interest on bank deposits which made them more attractive than other forms of investment.

The Growth of Branches
In the first Annual report on trend and of Banking in India for 1949, the Reserve Bank of India complained that “the developments of branch banking in the country has been lopsided and where as some areas seem to possess more than adequate banking facilities, other are undeveloped of underdeveloped from the point of view of banking business.
In 1962 an important step was taken on branch licensing. The banks were divided into three categories. That is
i.                    All India Banks.
ii.                 Large Regional banks and
iii.               Small regional banks three branch expansion programmes were launched each spanning a period of about two three years.
Lead bank scheme
The gargil study group appointed in 1969 to study the organizational frame work for the implementation of social objectives the report recommended that an organized effort should be made by the banking institutions to plug the credit gaps in rural areas under this scheme, the geographical coverage of branch banking got a further impetus with special emphasis on rural areas.
Promotional Agencies
They confined their operations largely to a few sectors such as industry and trade. Agriculture, small scale industries etc… which constitute the foundation of our economy, by and large, were not able to receive the desired financial support. The cooperative banks, which were entrusted with the task of looking after the credit requirements of the agricultural sector, did not fully succeed.
Credit to Priority Sectors
The first operationally significant step taken by the governments after nationalization, was the identification of certain sectors, namely agriculture, small scale industries, retail trade, small business, road and water transport operators, self employed and professionals, exports, and educations, as priority sectors which were to be given loans at concessional terms. Credit allocation was deliberately changed in favour of these sectors.
Assets and Liabilities
Commercial banks apart from providing a vital service, are business enterprises and should therefore conduct their affairs in such a manner as to conform to efficient business norms, both in collecting funds from different sources of funds are deposits, borrowing, profits, etc… The avenues for utilizing these funds are loans and advances and investments in securities etc…
The source and use of funds need to be such as to keep the banks liquid and profitable. Unlike the non-banking institutions, the bankers ought to give more attention to these two conflicting aspects of business viz liquidity and profitability because of the special nature of the deposits and the advances.

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BANK RATE POLICY

Bank Rate Policy
Introduction
Bank rate policy is an instrument of monitory policy. The central bank is responsible for a no. of objectives such an currency stability, financial stability, growth in employment and income etc. In monitory policy it is important to remember in the connection that price stability is closely connected with financial stability. Bank rate policy involving the changing at discount rate, so as to influence the market rate of interests. Which play a important roll in the creation of credit.
Bank rate policy
Bank rate in the rate which the central bank re discounts certain define bills and other eligiblepapers. The central bank of a country is the ultimate source of cash and in there for considered as Render of the best resort and Banker’s Bank. In this capacity it has to meet the genuin requrents of the bank. In times of emergency a central bank will be willing to extent rediscounting facilities to the bank provided. They offer short term assets which considered eligible for rediscounting by Central bank. A Central Bank extents such a facility only at price. This is technically known on Bank rate or discount rate.
The relationship between the bank rate and the market rate endows the central bank with the power to influence credit creation of banks. A high bank rate is likely to deference the total amount of money in circulation and a low bank rate to increase the total amount of the money in circulation. Thus whenever the central bank feels it necessary to decrease the total amount of money in circulation, it will increase the bank rate. This will be followed by an increase in the market rate. Higher market rates will discourage borrowing, resulting in a reduction of bank credit.

Mechanism of Bank Rate Policy
Let as assume that inflation conditions are existing in the economy. Here, the central bank intervening and raise the bank rate. This will increase the cost of browsing for the banks. Consequently the market rate will go up the increased market will discourage businessmen from browsing money. This will Check the business activity and unemployment will ensure the demand goods and services decrease because of the decrease in purchasing power of the people. This in turn, will affect the producer’s adversely. Further reduction in produce the result. A demand decreases price will ultimately comedown. Then an increase in the bank rate will be followed by a reduction in total amount of money and circulation, reduction in money income and prices and general slowing down of economic activities. Conversely a decrease in the Bank rate will be followed by a reduction in the market rate. This intern will be accompanied by increased borrowing, increased money income, increased price and expanded business activity.
Bank Rate policy under gold standard
Under gold standard, a variation in the bank rate will re-adjust, the internal cost price structure and will correct any disequilibrium in the balance of payment. Followed by loss of gold from a country owing to mall adjustment between export and import or by an ensure flow of capital owing to lower money rates priviting in  that country. The central bank can check this by increasing bank rate. In short an increase in Bank rate will help the country to correct any adverse Balance of Payment.
Limitation of Bank Rate Policy
·        The efficiency of bank rate policy depends to great extent, on its power to influence markets rate.
·        It depends on the necessity of the commercial bank to approach the central bank.
·        Elasticity in the economic structure on a country.

Balanced versus Unbalanced Growth: Nature and Limitations.

Balanced versus Unbalanced Growth: Nature and Limitations.

At the end of the Second World War, economists turned the direction of their work from formulating methods to further enrich the Northern Hemisphere and combat communism, to instead trying to achieve economic development in less developed regions such as Africa, Asia and Latin America. A school of thought emerged, veering away from common economic theory, instead focusing on practical idea’s, based from a historical prospective. This school all agreed on industrialization as being the engine for economic growth. Economists like Roseinstein-Rodan and Nurkse put forward a case for Balanced Growth strategies, whereas Hirschman and Streeten argued for Unbalanced Growth strategy’s to achieve development and growth. In this essay I shall outline both of these ideas, why they were favoured, and their limitations. In conclusion I shall look at cases for implementing one over the other and its implications and merits.
“Nurkse, like Roseinstein-Rodan emphasized above all the need for a co ordinated increase in the amount of capital utilized in a wide range of industries if the critical threshold of industrialization was to have a chance of being achieved.” (Nurkse: Process of Economic Development.1962) The main contributors for Balanced Growth were Roseinstein-Rodan and Nurkse. They both shared similar ideas, in that they argued for simultaneous investment across the economy to encourage growth through output being consumed domestically. Balanced Growth can be plainly seen as when a country implements policies to induce growth on industries, so that they grow at the same pace to create markets for the goods and services produced. Roseistein-Rodan introduced the theory of “The Big Push”. The big push he argued was necessary in countries that didn’t have the framework for spontaneous economic growth. From his research in Eastern and South Eastern Europe, he observed that a “big push or critical minimum effect was believed to be necessary to break out of a low level equilibrium trap.” (Meier: Leading Issues in Development. 1995). He saw this as the best and most efficient way to encourage industrialization. It must be noted
however that these ideas stemmed from Europe, and didn’t symbolise the modernm Third World (Africa and Asia), and he admits that he used European countries as they were similar, but vitally not identical models. He later studied that Latin American countries, but mainly India that it would be easier to identify causes and effects by studying countries/regions by groups and not individually.
“A minimum quantum of investment is a necessary-though not sufficient condition of success.” (Roseistein-Rodan: Natura Facit Sultum, Analysis of Disequilibrium growth process.1957) Roseistein-Rodan stated that through the big push of concurrent industrial investments, the phenomena of virtuous circles would arise and diffuse rapidly diffuse into the economy. Nurkse stressed the importance of virtuous circles in growth and development. Virtuous circles arise when large-scale investments in one sector i.e. petroleum, impacted positively on other industries. Investment on petroleum such as research would lead to more efficient and cheaper fuel, which benefited haulage firms. Firms would become more efficient and provide cheaper  prices through lower costs from better fuel. Price reductions would be passed onto the
consumer, who would have more disposable income which can be spent on locally produced goods. This would provide a vast network across the economy, which would induce cheaper prices, increase efficiency, increase output, and increase incomes, which would increase aggregate growth. It was to this that Roseistein-Rodan likened such a process to an aeroplane, which needs to surpass a critical speed before it can take off. Countries similarly needed to surpass a stage and build up momentum for growth to occur; a bit by bit approach he stressed would not achieve meaningful growth. Roseistein-Rodan also tackled the issue of an excess agrarian population, which was disguised unemployment and underemployment. Evidence for this stems from the
past 150 years in which the total world population had doubled, but 66% of it
occurred in the third world. Nurkse argued that in these countries, agriculture was
culturally integral to these regions, thus them being having agriculture based
economies. Thus an increase in population, space on the land fell. This excess labour manifested itself through underemployment of peasant cultivators due to small allotments. Roseistein-Rodan stressed that this was a problem as these people received little or no income, and the higher the population, the less output produced. This labour should have been used for industrialization, specifically labour intensive methods of industrialization focused on consumption industries, whilst simultaneously importing heavy industry products. The labour could earn an income, which could be used to buy local goods from industrialization. This concept was also shared by Lewis in his Two Sector model of development.




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