Background: It has been a matter of concern for the Govt. of India (GOI) to reform the Cooperative Credit Structure in the Country. Different Committees were set up to put forth their recommendations. This included the Jagdesh Capoor Committee and the Vikhe Patil Committee. Lately, the Govt. of India appointed another Task Force in August 2004 headed by Prof. A Vaidyanathan which submitted its report in February 2005. All these Committees have been unanimous in their view to strengthen the Cooperative Credit Structure. by way of recapitalization Union Finance Ministry while presenting the Union Budget for the year 2005-06 proposed to accept in principal the report of the Task Force and decided to hold wide ranging consultations with State Governments and other stakeholders before implementing the recommendations. 

Implications of the Task Force Report on Rural Credit Structure- in J&K: The recommendation given by the Committee shall definitely have far reaching consequences for the Cooperative Credit Structure in J&K State which has suffered heavily due to turmoil for more than 15 years. Since all the three District Central Cooperative Banks of the State are not complying to the minimum requirements of section 11(1) of the Banking Regulation Act 1949.Doing away with the eligibility criteria, as fixed by the Task Force, which needs a soft approach in so far as J&K State is concerned, the Credit Cooperative Structure is expected to receive a package of more than Rs. 192.98 Crore, provided the issues relating to eligibility criteria is revised from recommended 25% to 50% of Capital Erosion (as Anantnag Central Cooperative Bank has an erosion of 43% as on March 2003). This package would definitely give a lease of life to the sick Cooperative Credit Institutions of the State. Like-wise the eligibility criteria of 50 % recovery on demand for the PACS shall leave almost 95% of such Institutions out of the Package. The criteria may have to be fixed as 10% recovery on demand

Needless to mention, the Anantnag Central Cooperative Bank -one of the oldest Banks of the State, shall get a fresh impetus as otherwise the RBI contemplates to reject the application of the Bank for carrying on the banking business under section 22 (3) of Banking Regulation Act 1949.

Main Recommendations - Revitalization Package for Cooperative Credit Institutions Financial assistance to be made available to all three tiers and to cover:

• Accumulated losses
• Amount required to reach minimum norm (CRAR - 7 %) by all of CCS.
• Return of state Government Share Capital.
• Institutional strengthening ( a / cutting system, MIS)
• HRD
• Implementation costs
• Eligibility criteria recommended for PACS, DCCBs and SCBs.
• Financial support only for viable & potentially viable units

Financial Assistance -Quantum ( At National Level)

• The Financial Package will be based on specially audited balance sheets for PACS, DCCBs and SCBs with position as the end of March 2004
• Quantum of assistance tentatively estimated at approximately Rs. 14,839 Crore ( incl of Rs. 4000 crore as contingency ) based on estimated losses as on march 2003)
• The actual disbursements to be phased over 3-4 years and to be subject to mid- course corrections based on feedback on implementation
• The financial assistance to comprise loans and grants

Design Features

• Integrated Package
• One Time Measure
• Participation Voluntary
• Financial assistance backended and based on empirical indicators
• Implementation phased and state flexible 

Response on the Task Force Report by J&K Government

While the recommendations of Task Force for recapitalization of CCIs have widely been appreciated, some concerns have also been highlighted on specific recommendations of Task Force, which are as follows:

a - Eligibility criteria for recapitalization support:

It is suggested to re-examine the recommendations on the eligibility criterion for identifying the eligible institutions for recapitalization. The criterion must be "accommodative" and "inclusive." The most important consideration should be the long-term viability of the Institution rather than the state of its present financial parameters.

b - Special Audit to Assess Accumulated Losses:

There is no real justification for resorting to special audit for reassessing the quantum of assistance required for recapitalization. It may be practical to accept the statutory audit conducted by appointees of the State. However, Special Audit may be carried out as suggested by Task Force, wherever Statutory Audit has not been completed as on date. It could be avoidable waste of time and effort put in to carry out yet another audit called the Special Audit. In the J&K State, the audit of PACS and Cooperative Banks has been carried out on regular basis. The position of accumulated losses of all these institutions is readily available and can be relied upon for working out the extent of financial assistance needed for recapitalization purposes. The accumulated losses of 3 District Central Cooperative Banks is about Rs 117 crore. This comprises of Rs 78 cr. of Jammu Central Cooperative Bank; Rs 7 crore of Baramulla Central Cooperative Bank and Rs 32 crore of Anantnag Central Cooperative Bank.

The SCARDBS have been kept out of the purview of the recommendations of the Vaidyanathan Committee Report, which does not appear to be fair as the Task Force seeks to correct substantially the losses suffered by the Cooperative Credit Institutions by providing short-term and medium-term loans to the farm sector. The SCARDBS too have suffered extensively by failing to recover their long term loans to the farm sector. They too need to be brought within the ambit of Task Force Recommendations.

c - Retirement of Share Capital:

Retirement of Share Capital at this stage shall weaken CCIs as the time is not ripe for this purpose.

d - Sharing Pattern on the Revival package:

The sharing pattern suggested by the Task Force is very difficult to implement. In view of weak financial position of State Governments, it is suggested that Government of India and NABARD should be major partners in sharing the revival package throughout the country except in North Eastern States and J&K where Government of India may contribute revitalization support to CCIs. It is agreed in principal that the State Governments should meet the invoked guarantees but the financial position of the State Government is not that good to permit it. The Central Government thus needs to provide necessary financial support to the State Govt. to discharge such obligations. However, such assistance should be accompanied with corresponding reduction in the funding of accumulated losses, discussed under para (d) above, wherever such losses are caused by non-invoking of Govt. Guarantees.

e - Voting Right:

It is not desirable to recommend membership to the depositors with voting rights as it may create chaos in the functioning of the CCIs as the number of depositors will be much larger than the shareholders of CCIs. It is suggested that depositors may not be given voting rights.

f - Enactment of Parallel Law:

It is suggested that reforms be brought in the Cooperative sector based on the Model Law. Various State Governments have in fact initiated changes in the Cooperative Legislation aimed at making these institutions "voluntary" and "democratic" organizations. There seems no justification of enactment of parallel laws.

g - Other Suggestions:

1. Cooperation should continue to be "State" subject. Equity holding of State Governments in CCIs shall continue, but should be kept at a level higher than that of share of members. State Governments may work as friend, philosopher and guide and must formulate promotional and developmental Programmes of these institutions. State Govt. should ensure freedom and autonomy to CCIs and should not intervene in day-to-day management of these Institutions. State Governments must ensure timely election of Boards of management of CCIs and should desist from unnecessary suppression of the elected Boards.
2. Because, of the long spell of militancy in the J&K State, the cooperative Institutions have suffered the most. The cooperative structure has to be rebuild (revived), afresh and strenuous efforts are required to restore the faith of the masses in the Cooperative System of working. To have the CCIs entrusted for the management on cooperative principles is the sine-qua-non of a democratic set up. In the Jammu Division of the State, the overwhelming number of the institutions are being run by elected Boards except in some selected institutions which have gone financially bad and are being run by the nominated boards. The position in Kashmir Province, that has been most affected by militancy, the position ironically is other way around. The State Govt. is, however, committed to restoring all cooperative institutions to elected bodies soon.
3. De-layering of Cooperative Banks is an important priority. The present system of Cooperative Credit Structure has three tiers viz the State Cooperative Bank, the District Central Cooperative Bank and the Primary Agricultural Cooperative Societies. Each layer is dependent on other and each retains some margin of profit on account of financial intermediation. With the result, the costs go up and margins go down much to the disadvantage of the ultimate beneficiary, the farmer. The system also involves operational problems. To overcome these, it will be desirable to abolish the middle tier, i.e, the DCCBs by following the policy of merger, wherever possible, and closure elsewhere.
4. PACS to adhere to CRAR norms. The concept would have been ideal had the micro credit activity of PACS being run on standardized banking norms. PACS in the J&K State are being run on non-banking norms following naïve lending practices. In fact this has been one of the areas of concern in the financial relationship between the Cooperative Banks and PACS as the former follows laid banking norms and practices in all matters of lending but the PACS mostly follow conventional practices, leading to dissimilarities where the back-to-back lending practice ideally should have been similar. This is the root cause of the commonly known problem of "imbalances". Therefore, unless the PACS are exposed to the lending practices completely in tandem with the one followed by banks, application of CRAR norms would be impracticable. Secondly, unlike Cooperative Banks, the PACS have a limited area of funding, that is, providing farm credit, whose beneficiary has to be (mostly) the small and marginal farmers who constitute the majority. Lending to this section is wrought with huge risks. Draught, failure of crops and similar unforeseen situations usually wreak havoc on the financial strength of the farmer resulting into large scale defaults. Therefore, unlike banks, the PACS have a limited area of lending which is full with risks. These limited opportunities do not make it possible for them to adhere to CRAR. Having said that, it is principally agreed that these norms do discipline the lending business. It will be thus prudent to devise simpler norms specific to PACS so that they conduct their micro-level funding in a desired manner. For this, extensive awareness programs would also be needed to make the managements of PACS aware about the need for adhering to CRAR norms. This policy may also require putting accounts knowing people at the helm of lending business in PACS as they can better and quickly assimilate banking practices. Presently, most of PACS manage this activity availing the services of unqualified staff. 
5. However, in case of cooperative banks (non-urban), the policy to apply the CRAR norms will be prudent. It is however suggested that these norms be fixed at a comparably lower levels and they be given some time to graduate to the norms fixed for Commercial Banks and Urban Cooperative Banks. This will certainly help in disciplining their lending and investment activities.
6. Deposit-erosion and Net-worth norms should apply to DCCBs in the State of Jammu and Kashmir differently than proposed in the Report having regard to the state of their financial position as already explained above for which a case for providing special dispensation has been sought. The Task Force recommendation is that for assistance under recapitalization, the DCCBs should have a positive net worth and a deposit erosion not exceeding 25%. All the three DCCBs in the State have reached erosion level exceeding this limit. It is proposed that the norm be relaxed in case of DCCBs in the State to be eligible for support under the package. Similarly, the Recovery Rate criteria should be relaxed. The recovery rate of the Jammu Central Cooperative Bank and the Anantnag Central Cooperative Bank averages out to 26%. The State will continue its efforts to increase the recovery drive and support all efforts of Co-operative banks in this behalf, but for present the criteria needs to be relaxed so that these banks become eligible for support under the package.

Elements of Recapitalization Program (RP)

For receiving support under the recapitalization program, the cooperative banks should make the following commitments:

I Organisation Changes.

• Reduce Number of branches by way of closure (of loss making branches) and/or merger of weak branches.
• Management Costs to be brought down by 2% over a period of 3 years.

II. Staff Sacrifices. 

The recapitalization support should be accompanied with a MOU providing for the following:

Wage-freeze for 3 to 4 years, depending upon the state of financial health of the bank.

III. Allowances to be rationalized.

No such allowance should be given which is not directly linked with the productivity of an employee. This will help in reducing the cost of management.

Unions must agree not to go for strikes etc and healthy trade union environment is maintained.

Recapitalization should be subject to specified monitorable benchmarks such as:

1. Bank will be asked to cut down grant of fresh loans/advances within agreed limits.
2. The Bank will redesign its deposit products so as to reduce cost of funds; 2% reduction in average cost of funds over five years;
3. The bank will radically transform its investment portfolio so as to recommit investment to high yielding, high rating government securities etc;
4. Over the next six months, it will be essential to reduce staff through an appropriate Golden Handshake Scheme (GHS) or Volunteer Retirement Scheme (VRS);
5. All establishment costs, including salaries will be met from out of recoveries effected by the staff. For this, an appropriate 'escrow' account arrangement will be operationalised. The recovery' will be the main agenda.
6. Asset management over the long term is crucial to ensure maximum returns at least risks. The cooperative banks have the advantage of an outreach and raising low cost deposits. For example, this advantage could be fully utilized by investing these funds in debt./ equity markets through the J&K Bank to obtain high returns. Such risk hedging arrangement could stand to the benefit of these cooperative banks over a long period of time.
7. The RP should cover both the short term as well as the long term credit structure.
8. The R.P must aim at "one-time" cleansing of balance sheets of cooperative banks. This type of dispensation has earlier on been applied to commercial and rural banks where the Central Government has equity. The position is not the same in case of cooperative banks where the Central Government is not an equity holder. Recapitalization assistance, should, therefore, flow as Tier-2 capital to institutions (may be as an interest free loan repayable over a long period of larger time-frame time, say, 15 to 20 years.)
9. It should be made mandatory that the banks adhere to the "Prudential Norms". For this purpose, they need to be provided funds to meet their provisioning needs under the overall framework of Recapitalization Programme.
10. As mentioned earlier, the recapitalization program should also address the demands of long-term cooperative credit institutions and cover and the "long term" credit so that institutions such as SCARDB, J&K are brought on rails. An assistance of Rs 20 crore is required to help the bank to overcome the present financial problems largely caused by high loan defaults. Since the bank at present is not extending loans to fund the long-term requirements of the farm sector in view of financial constraints, the interests of farmers are getting adversely affected. Hence, the need for providing a special financial dispensation of Rs.20 crore to SCARDB, J&K.