Banks – Rural – Operational Excellence / Other Aspects - A viewpoint. Loud Thoughts

 

Banks – Rural – Operational Excellence / Other Aspects - A viewpoint. Loud Thoughts.

 By                   Dinesh K Kapila

INTRODUCTION

There are any number of committees which have written volumes on the subject of operational excellence in coop banks. We also have the answers being found in financial re-engineering, digitization and computerization. The latest being of computerisation of Primary Agricultural Cooperative Societies (PACS) and integrating the process with the District Central Cooperative Banks and the State Cooperative Banks. These are well thought out initiatives and policy decisions. But will they suffice. These are initiatives which will certainly yield results but somewhat below the line of what is really envisaged or expected. Then the question of the merger of the DCCBs with the StCBs, always in discussion, is this an automatic solution for all the gray areas.

 Add to it the what we called earlier the Land Mortgage Banks, now they have renamed themselves as the State / Primary Agriculture Development Banks. Without attending to the functions attendant to the rebranding. These institutions are also under the cooperative banking fold and are oriented towards term lending, the years post liberalization have been hard upon them.

 The cooperative banks certainly require a thorough overhaul. The weakness lies in their structure and mode of management as also organizational culture and this is always an issue pushed to the background during any discussions on their revival or clawing back a part of their market share. Its been a consistent downward journey as regards market share or profitability or any such parameters for most of them.

 

Would the Shared Service Entity initiative, a shared services entity for the adoption of technology and various services on an ongoing basis work as envisaged. Can the RCBs re-discover themselves with a focus on agri-business lending, agri value-chain financing, digitalization of KCCs and understand the imperative need that the business growth of RCBs must be accompanied by the use of technology. As adoption of technology is a costly proposition for individual banks, a shared service entity would help.

In the quest for digitization,  a shared services entity will provide them technology support. Co-operative banks are already on the core banking solution (CBS) platform, but they don’t have other digitized services,  such as loan origination and management systems, credit underwriting standards, fintech collaborations, etc. For small banks, all these things are difficult (to implement due to limited resources).  Considering constraints such as low CASA, high cost of funds, limited expansion of loan portfolio and inability to extend modern banking services, the RCBs need a Board approved fin tech policy by RCBs, which will pave the way for a greater association of fintechs with RCBs.

At March-end 2024, there were 34 StCBs with 2,140 branches and 351 DCCBs with 13,759 branches. At end-March 2023, there were 1,06,955 PACS spread over 6.5 lakh villages, per RBI data. These entities provide crop loans and working capital loans to farmers and rural artisans.

As is stated, there is a huge potential for rural India’s digital transformation and outlined NABARD’s initiatives such as Shared Service Entity, CBS plus, e-KCC portal, the e-NWR Pledge Loan Gateway, Agriculture Infrastructure Fund (AIF) portal and NRLM portal. Digital KCC, Digital cattle finance and Public Tech Platform for Friction less Credit (PTPFC).. NABARD is enhancing the technology capabilities of short-term RCCs, establishing a shared services entity for providing them technology support. Co-operative banks are already on the core banking solution (CBS) platform, but they don’t have other things, such as loan origination and management systems, credit underwriting standards, fintech collaborations, etc. For small banks, all these things are difficult (to implement due to limited resources) but as an entity on a platform, it could work.

THE SCENARIO

We need to recognize the need to move to operational reviews and push for operational efficiency. This is the key. Make the system effective and business like. Pertinently, the higher level regulatory . administrative structure has to be less patronizing and at times too controlling in its approach else the dependency syndrome will persist. Merely tinkering with the structure will not be optimal unless we  recognise the need for change and even at the lowest tiers. We may facilitate, but ideally the drive has to come from within the structure. The staff has to be of professionals at all levels and not Government officials on deputation or the handpicked choices of the local politicians.   

Just as an example, the recent amendments on raising capital would definitely strengthen Governance structure of the banks. However the merger of DCCBs with the StCBs has to be studied on a case to case basis only. I think the amendments per-se have a minimal financial impact on these banks, unless the governance itself improves drastically. Even though the amendments have provided for a new window of Raising capital, it's very restrictive unlike that of Commercial banks. Unless the credit culture of the members in the sector improves, mere amendments will not be a panacea. A strong management of the merged entity in case it so happens with the full support of the State Government can definitely help but it has its own concerns.

The Cooperative / Cooperation Department has tended to dominate the manpower at the leadership level in most cooperative banks. Plus they bring along a highly bureaucratic mode of functioning. We cannot deny the interference from the senior levels of political governance and the bureaucracy. Most cooperative banks have a structure and the pay scales as in the State Government and then also a certain equivalence in decision making and work culture. This does not suit the requirements of a professional cooperative banking culture.

 During my service across J&K, Punjab, Haryana and HP I have frequently met Boards, specially in the districts, which have never even bothered to be aware about the market share, the growth rate of varied products and services in the district and particularly in the rural and semi urban areas, their own status and the scope and potential to improve upon their performance. The mode of election throws up semi aware Directors who may not be fully conversant with the intricacies and the responsibilities of their appointment. As regards professional directors, the machinery knows where to look for generally non controversial, low profile and inconsequential professionals. At a State Cooperative Bank, the CA and the Lawyer were the most unaware professionals I had ever met !    

Now coming to the actual loud thoughts, even if they are unstructured. My thought, for example in Haryana, are the Rs 5000 crore losses at the level of PACS and in addition imbalances. I understand the data indicates it is much higher now. Out of 730  odd PACS only 57 were on profit, as I last know. Now unless that is settled, repairing the upper layer gets us nowhere, ultimately the cascading impact is there.

“Further, in order to strengthen PACS, project for Computerization of functional PACS with a total financial outlay of ₹2,516 crore has been approved by the Government of India, which entails bringing all functional PACS in the Country onto a common ERP based National software, linking them with NABARD through StCBs and DCCBs. To strengthen the long-term cooperative credit structure the project computerization of Agriculture and Rural Development Banks (ARDBs) across 13 States/ Union Territories has been approved by the Government. In this regard, GOI share amounting to Rs 4.26 crore was released to 8 States/UTs in FY 2023-24 and FY 2024-25 for procurement of hardware, digitization and setting up of support system. These are sourced from the Govt response to a parliamentary question”. The point is, will it restore market share and profitability and viability. Will mandating certain businesses through specific cooperative structures only work.  

DIAGNOSIS

What could be the areas we must look at in general and not state specific terms. As per me these are –

-        Understand the business and the market and the need for a certain set of policies, cultural, human resources, commercial, financial, etc.

 -        Initiate Recruitment and of the talent specifically sought for. Decide the functions and products and plan the recruitment and training accordingly.

-         Mixing the new talent rationally with the existing manpower specially to reduce the friction of the old guard with the new.

-        Hierarchy levels to be redefined as per the competitive scenario and a product oriented organizational structure and a professional working culture.

-        Products such as Housing Loans and maybe Gold Loans could be introduced.

-       Moving PACs away from Branches – in Haryana the PACS were merged and then placed near the branches of the DCCBs, this impacted visibility and business.

-        Ensuring the optimum efficiency in business including upto the use of lockers etc

-        Building a credit culture at all levels for repayment

-        Training of staff on Term Loans for Agriculture at the DCCBs in case the HSCARDB is not scaling up,

-       All products for rural and semi urban areas are to be made available at a Branch or a controlling level

-       Introduce new products only after a clear understanding of its commercial aspects. A multi purpose society does not imply a menu of products and services, unless the market is there or can be seeded. 

-       A strong Board (including till the merger at the DCCBs as in some States). And a control on transfers. DCCBs have weak boards, they require training and a business orientation. I found the frequent shifting of the GMs of DCCBs a major hinderance in effective working.

-    Just to add, then the issue of losses at the PACS and their resolution would also be a factor to be addressed one day. It cannot be delayed. 

Then there other aspects to be thought off. While working in Haryana and HP I could observe that cooperatives to succeed need not always work in a three tier system. DCCBs can succeed on a  standalone basis also, as in HP, but there the PACS have hardly any banking relationship with the DCCBs as regards crop loans to farmers. PACS which are under loss or making losses need to be ignored as of now unless recapitalised by the State Government. This is a very sensitive area though. Credit functions of PACS *wherever it's viable with respect to recovery* could be taken over as branches of DCCBs. Can this be thought off. Alternatively, and preferably, they can be relocated. Through this network, the DCCBs should also do the functions of banking - mobilising deposit and disbursing loans.

CORE CONCERN

The core issue is Good governance, with full support from the State Government. Recovery would be the key. Always. This has to be appreciated and understood by the political leadership, the bureaucracy and the Cooperative Department. Non KCC loans and other secured loans should be issued more till the banks get viability status. ( Every KCC loan is as stated by many a cash loss to the cooperative system). The Staff as always holds the key for revival. They need to be motivated to do banking in its true spirit including mobilising low cost deposits and cross selling of other loans. Repairing of the upper layer is possible if these measures are taken, instead of waiting for the lower tiers to get better, which is a herculean task. The RCS and the Cooperative Department must be less administrative and more analytical as regards planning and strategizing on a real time basis with a focus on results. The frequent reshuffling of the RCS only impedes their ability to understand the system and their assigned role. A three year term would be ideal for a RCS.

 Self confidence in their Banking Model is required amongst the staff but it should be clear they work for a Bank and not the State Government. That divide from the State Government and its mode of functioning has to be enforced. And the staff and new recruits must understand banking is a service and a business and carries a certain risk and its related aspects. Some PACS Can be developed with mentoring to be multi purpose with profits. But no subsidy. They have to work for it.

 Alongside the customers must be trained and then the training reinforced by repeat training on the essence of the spirit of cooperatives, the mode of functioning, the need for active participation and awareness. This must be extended to the staff too. This aspect has been long neglected.

HUMAN RESOURCES

 The streamlining of the Human Resources of the Cooperative Credit System in any State (StCB DCCBS PACS) and it’s aligning with the organisational structure / organisational requirements now necessitates the need to professionally equip the Human Resources. This is a challenge as their training institutes are not equipped for short term capsule courses. In addition the staff cannot be deputed for long periods on training. BIRD LKO and the Centre for CPEC has now developed professionally designed and comprehensive courses as follows, CTFC, CPCB Part I, CPCB Part II, CPS. The CPCB is a professional course for all levels of the staff and enables an exposure in an effective manner to Banking and Banking Management in the context of Cooperative Banking. The CTFC can be assessed by the StCB staff and the DCCB Staff to equip them with the necessary knowledge to evolve as effective resource persons on imparting inputs on Cooperative Banking.

The StCB can effectively identify staff with the necessary acumen for this course and also invite applications for the same. The CPS will professionalize the staff at PACS, this is long overdue and is a necessity as Banking evolves even more competitively. These four courses are now a necessary professional input as Banking not only evolves but a multitude of Fintechs, start ups, SFBs, NBFCs and MFIs focus on rural areas and semi urban areas for expanding their market share. This shall only be at the cost of the Cooperative Credit System which has already ceded the major share to commercial banks.

 Therefore the need to encourage and motivate the staff at all three tiers by incentives so as to initiate the process of embedding professional knowledge. The incentives would be primarily monetary but the Board may consider if we can evolve a long term plan to incorporate these as an assessment tool for career advancement. This could be the start.

COMMERCIAL ORIENTATION

We get focused on governance, how do we inculcate an adherence to a commercial orientation. A product orientation, a process orientation, a sales cum marketing orientation, as also a customer and competitor orientation. This is the fulcrum. The lever.  We have to create this business orientation, else the initiatives such as multi purpose PACS can again face challenges.   This has to be supplemented by data. Including of  customer feedback, preferences, and trends.

SADBs

 The LDB structure has an issue of managing relations with Customers over a large area as a term loan approach implies an expanded area to cater too but with fewer regular meetings or follow up. This needs to be filled up even if by technology (SMS alerts on loans and repayments or mails or an app). Maybe an app to effect repayments too. Plus maybe training on agriculture and basic of farm activities from time to time. This could enable relationship building instead of an automated response at the time of disbursement and then recovery. The frequency of meeting and relationship building efforts has to be enhanced by resort to both technology and physical means. 

 The Commercial and Cooperative Banks have the advantage of offering a broad spectrum of products. Could the SADBs  develop a wider area including even Rural Housing Loans after due appraisal and not simply by mortgage of land. Can we include two wheelers and housing and off farm as products etc. Training to enhance professional knowledge is possible through the BIRD for Senior Management and Middle Management. The Private Sector also has well equipped training institutes at each State now.

 Repayments to NABARD by the PADBs / SADBs, are always a concern and consistently so,  this can be possibly resolved by a mix of Guarantee, Budgetory Provisions and Recourse by the State Governments where applicable to enable repayment- and payment of interest- could be a major component of grant. A small component of soft loan and in addition a credit limit from the State Cooperative Bank would be useful. Maybe raising deposits with the guarantee of the State Government. But the SADB may also draw up simultaneously an action plan for revival. With specific timelines and commitments of stakeholders. Lending must resume at these Banks where it is currently being withheld stopped but with a tight control on defaults. The TNSADB has reportedly revived, by Gold Loans, if so, why not introduce in other States.

 To widen the reach of the SADBs, maybe the StCB can avail Grants for Financial Inclusion from NABARD and associate the SADB / PADBs at all camps. Or they can jointly organize from their own funds. They can present a complementary viewpoint to the potential and prospective customers including insurance products but also clearly  convey the close relationship with them, their own ownership and role of the State Government and nicely state repayments and regular repayments would facilitate the deepening of the relationship. The Feeling of ownership has to be drilled into the customers particularly in PADBs and at PACS and then emphasise financial literacy at all such camps.

 Again as in the StCB and DCCCBs, the Staff at the SADBs, - and recruitment of staff in tune with the times is a must – the staff must realise that on knowledge and understanding they are at par with other Banks. The BIRD / Training Establishments as appropriate can develop simple to complex brochures and regular newsletters to maintain a link with the HO and Field offices. Computerisation of SADB PADBs is a priority. On a grant basis.

 A couple of officials from a State recently discussed with me if the SADBs / PADBs could start the initiation of Short Term Business. Well, with interest subvention upto ₹3 lakh, much of the smaller term loan requirements are met through crop loans. Why a farmer will borrow from the LT structure.  The fact is that a wide range of Medium Term and Long Term in business is the forte of SADBs / PADBs and they should stick to it. ST purely as in crop loan could be a concern as I understand there was some issue relating to interest subvention for them in a major state down South. Actually, as I last knew the TN LDB has turned around. It is continuously reporting profits, maybe through jewel loans.

 But could a story or rather a business be built around the concept of Loaning for a medium term or long term asset and then also paying out a loan for yearly maintenance and inputs related to the asset financed earlier. Example, Horticulture, finance the cost of trees and tree guards or similarly in Fisheries etc. This will require building up a profile of such projects. The Unit Costs and Scale of Finance decided in each State can provide leads. Even in Horticulture it may include Inter cropping etc to be supported by short term loans. The SADB / PADBs can expand upon this in most activities. 

 To add, any such initiative the LDB does will have to have blessings of the State Govt and NABARD for permission, guarantee and funds etc. That spade work would be required. Then we come to the short term loaning and the sources of funds.  Crop Loans are highly competitive, they can go in for diversified advances like TL for housing, MSME, services and mortgage loans (secured loans).

 Now the Rural economic landscape has diversified to accommodate in favour of Off farm activities including services. For this the SADB has to develop a robust credit appraisal and monitoring/recovery mechanism and market intelligence and a rigourous demand analysis., Lastly strong monitoring and a computerised funding structure and reporting structure are a must. The PADBs may avail refinance as per the business in conformity strictly with the ground level potential and HR profile and avoid excesses in lending or in avaling refinance. And if they really do require  to scale up business, then build an Action Plan, and if unable to repay refinance, then the action plan must include  a request for Rephasing-of any repayment if so required to the refinancing tier - but with an OTS etc and specific timelines and formal commitments including guarantees from the State Government. This has to be strongly professional.

 The option of a merger of the SCARDBs with the StCBs has often been discussed but the accumulated losses at the SCARDBs pose a consistent challenge in this regard. Plus the apprehensions of the staff in both the systems are a reality as the work culture and orientation is stated to be at a variance. The State Governments may examine the possibility of absorbing the losses. The Staff can be placed at other Departments too.  Alongside, mostly the loan waivers have not benefitted the SCARDBs, they have been the step child in the system.

Political announcements at times are for the waiver of crop loans but land up impacting recovery at the SCARDBs too. If the SCARDBs are to continue, then the operating systems have to change. And a recognition of the same by all stakeholders.  And they are not the poorer cousins, to put it honestly as I often found the case to be. The benefits and or facilitation extended to cooperative banks need to be extended to the SCARDBs too. Maybe a recognition of this would be a major initiative, in case they are to continue.    

COMMON ISSUES StCBS and SADBs  

Some areas of concern which could be common to StCBs / DCCBs / PACS / SADBs / PADBs - As in Cooperative Banks, the PADBs as stated require a technological upgradation. Of technology and systems. They must train own staff and upgrade. Develop an app too. Obtain permission from the RBI if required. Recourse to credit rating / CIBIL would be a facilitator (by SADBs by obtaining data from StCBs) certainly by maybe stating the STCB and SADB are wings essentially of the State Government and offer complementary services and hence credit ratings were shared.

Training cum Extension Camps are just about absent at the PACS, DCCB Branches, PADBs. Why cannot each PACs organise training of its members of half a day at least twice a year. On its services and business. They need to be focused on diversification, productivity, the need to avail credit wisely, to enable access to quality seeds and inputs and application, extension and the latest financial products. This must happen.  Meanwhile explore if this can be effected independently. Sound out customers about this too. Introduce the products and Social Insurance Schemes (plus any other you have) and also emphasise security issues and repayments and recovery. Obviously a better relationship should normally yield better business. PACS must strive for multiple business lines and generate a surplus by efficiency and not just an administrative fiat by the State Govt. Their Managing Committee must discuss business efficiency and businesses. 

 A One to Two page summary may be developed by the staff on products from NABARD to Cooperative Banks and PADBs. Loans and Grants from NABARD and then their own products for enabling the Cooperation Department and senior officers as also the senior bureaucrats to know the areas for review. In addition, a Two to three page summary plus PPT on each Inspection Report of NABARD- last two reports - item wise - remarks of the IR and compliance and specific progress. Data to be always stated. A query on each point by the reviewing officer will elicit more information. this will enable stronger reviews and actionable points. Updated policy manuals and operational manuals at both the STCB and SADB are a must.

As regards PACS, they need to be computerised on priority and linked  with DCCBs. Computerisation has to include strict adherence to all regulatory stipulations and cheks for security issues. A shift in the thought process will need to be ensured,  Just now the PACS are another layer - an important layer - but not integrated. Then the PACS are not considered as Banks - outside the regulatory review - the STCB May plug that gap by a sound MIS. Until regulation of PACS is integrated, the StCB may enforce a strong MIS and share the reports with the RBI / NABARD as appropriate.

RECOVERY REVIEW LIAISON 

The DRCS and ARCS are to be monitored on time taken to hear out cases for recovery. At least reminders are to be issued in writing as a follow up. Excessive delays cause inefficiency and encourage defaults. This has always been a weak area and is not monitored effectively. These institutions need to in addition to build up customer profiles including Aadhaar numbers and contact numbers and the socio economic pofile. The Government may signal it’s concern for farmers and their debt but quietly allow reasonable follow up for building relationships and recovery. I know of some sensible politicians who have practiced this mode.

 The Senior Bureaucracy may review strictly the Board of Directors of DCCBs for their deliberations and focus on business and recovery. Each DCCB and DM PADBs as a practice must make regular PPT Presentations during visits and reviews by Senior Officers on Business and Recovery. This will bring in discipline and professionalism. 

 Close liaison with the SLBC will be useful to the CEOs. The SLBC can provide two years data and even more on PSU Banks, Private Sector Banks and Small Finance Banks and the RRB. The credit growth, recovery percentage and deposits and as against the SADB and STCB. This will give an insight into market share - in Crop Loan, in Term Loans in Agriculture, MSMEs and OPS. The SADB and STCB May check if their technology platforms are assessing NPAs properly. If possible do check the business and recovery of MFIs and NBFCs engaged in Agriculture/ Rural Areas etc.

 The imperative is as to build a close relationship with Customers to ensure a better business for both deposits and loans and repayments/ recovery, most HO’s of DCCBs and DCCBs or their branches do not have a customer profile or of the top customers and the weakest too. And the StCBs and the DCCBs must diversify their lending profile in tune with the changing trends, potential and demand. Training may be imparted and the staff guided to pursue the business in the services and small manufacturing / agro processing sectors. Staff at controlling offices must consist of professionals able to chart trends and potential. And cogent databases are just missing. These need to be built up.    

 Maximum importance is to be accorded to restore the relationships with farmers of PACS and with DCCBs. This has been diluted and the disconnect has impacted business too. The Inspectors of PACS from the Cooperative Department are a weak link in monitoring and coordination, to facilitate the linkage of PACS and transparency with Coop Banks the DCCBs may develop their own feedback cum business planning.

 A CEO of a StCB from a State from another region (Linkedin has advantages) reached out to me to discuss the pros and cons of the Three Tier Structure  and should they really undergo the stress of such a process. Well my views are that the Three Tier Structure evolves from one essential fact - That is the huge number of small and marginal farmers as also medium scale farmers and artisans. The traditional structure was a necessity as there was a limited application of technology and the structure evolved to enable controls to be placed by one layer above the layer. This enabled an outreach to a large number of farmers with due administrative and financial controls inherent in the structure.

 As of now the system has to continue as digitisation and technology cannot do away with a few fundamental factors. The structure requires strengthening and the first objective is to build an ownership of the system by the customers cum members. Training and repeat training requires a physical platform. Added to it is the evolution of PACS in many states as multi service centres including retail which again necessitates a physical platform for transactions. Then farmers and artisans rural areas require the comfort of a physical interaction to enable trust and mutual faith. Any strengthening of the system would require training, repeat training, extension and more services to be added.

 We also have to recognise the reality of inefficiency in management in the Cooperative system which would only increase if a layer is removed and the span of control increases. There is a protective layer too in that any deficiency or black swan event in a certain district or region will not contaminate the other districts or layers and can be localised for correction.

 We need to recognise that the Commercial Banks as such are not organisationally and culturally equipped to operate beyond semi urban India and the main rural markets which act as nodes. The hinterland should be a competitive space for cooperative banks, RRBs, SFBs, NBFCs and NBFC MFIs and SADBs / PADBs. The three layer approach will enable the due reaching out to the customer profile in a competitive scenario. The two tier offers no solution for business ills but the Boards at the DCCBs require a reorientation as they act as barriers in professionalism in banking. A sort of feudal mindset plays out and the Secretaries of PACS and the connected branch managers exploit the process.  

 But the PACS will need to be incorporated for better discipline into the formal structure which the States may oppose and would need to be addressed. The aberrations at the level of PACS need to be addressed by a regulatory mode even if it’s a light touch to start with. A Consultation cum Later Constitutional amendment could be the answer. This the States have to consider.

 Once we take up the PACS as an inherent part of the three tier then across the nation a certain commonality will develop in accounting practices and systems. This will also enable the weakest tier to improve its core financial competitiveness and competence and restore a degree of self worth in the staff. However the States have to decide if the staff of PACS are a part of the formal cooperative bank staff or stand alone entities - I am inclined for their staying organisation wise as stand alone entities. Each State will have to resolve the contentious issue of imbalances and accumulated losses.

 One example Haryana reduced the number of PACS and located them next to branches of cooperative banks instead of being used as an extension agency deeper into the hinterland which impacted their competitiveness. This was compounded by a lack of attention to active members cum customers and actual cash flows. HP has a scenario where PACS are inherently delinked from cooperative banks as regards credit flow to farmer’s.

 This implies a simultaneous training of the RCS and Cooperative Department staff. They have to understand the implications of their actions and inactions. And the CEOs must evolve from the DCCBs and the StCB and not the Cooperative Department. Training and MDPs and grooming is a must. A three tier layer is not administrative inertia but a structure designed to purvey credit plus physical services. And it will cater to that segment which even SFBs or RRBs may not address such as artisans and tenant farmers.  

 We cannot just continue with the system the way it is and assume that NABARD may continue to refinance or the State Governments may extend assistance in repayments etc. There has to be an acknowledgement of the changes in the economy and the operating environment and an acceptance of the need for a change as also to rebuild damaged relationships with customers / members.  Harking back to older times and the way things were is just academic discussions now. But a stable cooperative banking system is a must to be a set off against the other banks and has a space and niche of its own. This has to be recognized.    

 I do not know if the officials I sounded out  after they sought me out (on Linkedin and by phone) were convinced about the above loud thoughts. But its my firm belief that ultimately operational issues and the levers which move products and services have to  be addressed. And Management issues. We can add reports and multiple modes but the answer primarily lies in the appropriate operational fit and excellence in operations.

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