Chapter 2

Co-operative Banking in India

Co-operation means working together. The principle is as old as human

society. It is truly the basis of domestic and social life. The history of
modern civilization is, in fact, the history of co-operation, for without it
social and economic progress would have been impossible.

A co-operative is generally viewed as a social economic organization that

can fulfill both social and economic objectives of its members. A co-
operative is based on certain values and principles of its own, which dis-
tinguish it from other forms of organizations. The very motto of coopera-
tion, 'each for all and all for each', signifies loyalty, trust, faith and fel-
lowship. A co-operative is a perfect democratic institution of the mem-
bers, for the members, and by the members, and is based on the 'one
member, one vote' system of decision making.

2.1 Meaning and Concept of Co-operatives

The concept and meaning of co-operation has been given by utopi-
an socialists, religious thinkers, socialists, economists and reformists in
their own way. A few notable definitions of co-operation are given be-
low. According to H. Calvert, “Co-operation is a form of organization,
wherein persons voluntarily associate together as human beings, on the
basis of equality, for the promotion of their economic interests”1

The veteran Co-operator of India defined, “cooperation as a vast

movement which promotes voluntary associations of individuals having
common needs who combine towards the achievement of common eco-
nomic ends”.2

26
According to the Co-operation Planning commission (1946)3, “Co-
operation is a form of organization in which persons voluntarily associate
together on a basis of their economic interest. Those who come together
have a common economic aim which they cannot achieve by individual
isolated action because of weakness of the economic position of a larger
majority of them. This element of individual weakness is overcome by
the pooling of their resources, by making self help group effective
through mutual aid, & by strengthening the bonds of moral solidarity be-

tween them.”3

2.2 History of Co-operative Banking

The historical roots of the Co-operative Movement in the world days

back to days of misery and distress in Europe faced by common people
who had little or no access to credit to fund their basic needs, in uncertain
times.

The idea spread when the continent was faced with economic turmoil
which led large populations to live at subsistence level without any eco-
nomic security. People were forced to poverty and deprivation. It was the
idea of Hermann Schulze (1808-83) and Friedrich Wilhelm Raiffeisen
(1818-88) which took shape as co-operative banks of today across the
world. They started to promote the idea of easy availability of credit to
small businesses and for the poor segment of society. It was similar to the
many micro-finance institutions which have become highly popular in
developing economies of today. Although this helped spread co-operative
movement in many parts of Europe. In British it is came from the re-
vivalist Christian movement and found high acceptance with working
class and lower middle class segments of society. However, UK and Irish
credit unions in 20th century were inspired by US credit unions which in-

27
turn owe their emergence to Canadian adaptations of the German co-
operative banking concept. These movements were supported by gov-
ernments of the respective countries.

This success was achieved due to the failure of the commercial banks to
fund and support the needs of small business owners and ordinary people
who were outside the formal banking net. Co-operative banks helped
overcome the vital market imperfections and serviced the poorer layers of
society.

Indian co-operative Banks was also born out of distress prevalent in Indi-
an society. The Co-operative Credit Societies Act, 1904 led to the for-
mation of Co-operative Credit Societies in both rural and urban areas.
The act was based on recommendations of Sir Frederick Nicholson
(1899) and Sir Edward Law (1901). Their ideas in turn were based on the
pattern of Raiffeisen and Schulze respectively. The Co-operative Socie-
ties Act of 1912, further gave recognition to the formation of non-credit
societies and the central co-operative organizations.

In independent India, with the onset of planning, the co-operative organi-

zations gained more leverage and role with the continued governmental
support. Machlagan Committee in 1915, highlighted the deficiencies of in
co-operative societies which seeped-in due to lack of proper education to
the masses. He also laid down the importance of Central Assistance by
the Government to support the movement. The Royal Commission on
Agriculture 1928, enumerated the importance of education of mem-
bers/staff for effective implementation of co-operative movement. Sarai-
ya Committee, in 1945, further recommended the setting up of a Co-
operative Training College in every state and a Co-operative Training In-
stitute for Advanced Study and Research at the Central level. Central

28
Committee for Co-operative Training in 1953, constituted by RBI for es-
tablishing Regional Training Centres. Rural Credit Survey Committee,
1954 was the first committee formed till then to first delve into the prob-
lems of Rural credit and other financial issues of rural society. The co-
operative movement and banking structures soon spread and resonated
with the unexpressed needs of the rural Indian and small scale businesses.

Since, 1950s, they have come a long way to support and provide assis-
tance in activities like credit, banking, production, processing, distribu-
tion/marketing, housing, warehousing, irrigation, transport, textiles, dairy,
sugar etc. to households. Extent of Co-operative Banking Indian co-
operative structures are one of the largest such networks in the world with
more than 200 million members.

Co-operation is sometimes referred to as a way of life, but it is more a

form of economic organisation. Its main virtue is joining other people, on
a footing of equality, for the promotion of common economic interests
of the members of the co-operative society.

Co-operative movement was started in India as a policy of the Govern-

ment against the exploitation prevailing in the society. The depressed
class had a lack of self- confidence and was helpless. In the earlier years
there was not much contribution of the government to this movement and
so progress of the movement was too slow. It was felt that he movement
will not be able to go ahead without the help and assistance of the gov-
ernment. So the government gave this movement full support and protec-
tion. Credit of starting the movement in India goes to government only.

A co-operative is an organization established in accordance with

the provision of the Co-operative Act and in fulfillment of the general
principle and objectives of cooperation. In the method of business they

29
are similar to the commercial banks but in matters of organization and
management they vastly differ from them.

The main points of difference between the two are:-

1. The share of co-operative banks carry unlimited liability with the share

of joint-stock bank are of limited liability.

2. The shareholder in a co-operative bank can only cast one vote per per-

son without any consideration of the number of shares held by them

whereas the shareholder in a joint-stock bank can cast votes according
to the number of shares held by them.

3. The joint-stock banks cater to the requirements of trade and industry

while the co-operative banks generally cater to the needs of the rural
people, particularly in the field of agriculture and allied activities.

4. In India, co-operative banking is federal in the structure whereas the

joint-stock banks do not have such a structure.

2.3 Structure of Co- operative Banking in India

Indian co-operative banking has a pyramidical structure with
primary agricultural credit societies at the base, central banking unions
and central co-operative banks in the centre and state co-operative banks
at the top.

30
The Primary Agriculture credit societies, form the base of the federal co-
operative credit structure. These are village level institution, which di-
rectly deal with the rural masses. They are the link between the rural bor-
rowers and the upper tiers of the co-operative institution.

Central Co-operative banks are the middle rung of the three-tire

co-operative structure. These are of two types:

[1] Co-operative Unions whose membership is open only to co-

operative societies. Such banking unions exist in Haryana, Punjab, Raja-
sthan, Orissa and Kerala.

[2] Mixed Central Co-operatives Banks, whose membership is open to

both individuals and co-operative societies. The Central Co-operative
Banks in the remaining States are of this type.

State Co-perative banks are the upper most rung of the three-tire co-
operative credit structure. There is a State Co-operative Bank in every
state. They are an important link between the Indian money market and
co-operative sector. They also function as a commercial banks. They
provide a link through facilities to the co-operatives. They finance, con-
trol and supervise the Central Co-operative banks and through them the
31
primary societies. They function as a balancing center for the Central
Co-operative banks by making available the surplus funds of some of the
co-operative banks since the Central Co-operative Banks are not allowed
to borrow or lend among themselves.

Even if co-operative banks organizational rules can vary according to

their respective national legislations, co-operative banks share common
features as follows:

Customer-owned Entities: In a co-operative bank, the needs of the cus-

tomers 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 con-

trolled 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.

32
Co-operative banks are deeply rooted inside local areas and communities.
They are involved in local development and contribute to the sustainable
development of their communities, as their members and management
board usually belong to the communities in which they exercise their ac-
tivities. By increasing banking access in areas or markets where other
banks are less present, farmers in rural areas, middle or low income
households in urban areas. Co-operative banks reduce banking exclusion
and foster the economic ability of millions of people. They play an influ-
ential role on the economic growth in the countries in which they work in
and increase the efficiency of the international financial system. Their
specific form of enterprise, relying on the above-mentioned principles of
organization, has proven successful both in developed and developing
countries.

2.4 Origin and Development of Co-operative Banking in

Rajasthan

The co-operative movement in Rajasthan is playing vital role in

the social and economic development of the State, particularly in rural
areas. Initially, this movement was confined to agricultural credit, later
on, it rapidly spread to other fields like agro-processing, agro-marketing,
milk production and distribution, rural industries, consumer stores, social
services etc.

In 1904, when the Co-operative Societies Act was passed at that

time Rajasthan was not in the present shape and size. It was divided into
small dynasties or states. These states were not not aware about co-
operatives. In order to know the views about cooperation, the chief
commissioner of Ajmer-Merwar had organized a meeting of the revenue
officers. In that meeting it was decided that only poor farmers cannot es-

33
tablish co-operative societies because of unfavorable geographical con-
dition in Rajasthan. In spite of the above views, the general manager of
court of wards Shr. Gopinath has assured the chief commissioner to bear
the responsibilities of co-operative movement in the state. The co-
operative movement was started on 26th October, 1905, with the estab-
lishment of two primary agriculture credit societies at Bhinai. After that
other co-operative societies were established in other areas of the state.

The co-operative movement had started in the state in 1910. In

1910 a central co-operative bank was established to assist primary co-
operative societies. In 1913, three more central co-operative banks were
established. But the public did not associated with the movement and
those bank were taken as Government banks. In May, 1949, the new
state of Rajasthan was formed with the merger of small states. After that
the co-operative movement was spread through the state. The co-
operative department was established and the systematic development of
co-operative movement was spread in the state..

2.4.1 Structure of Co-operative Banking in Rajasthan

The credit structure of co-operatives in Rajasthan may be classified in

two categories:

[1] Short term and medium term

[a] Apex Bank[ State level]

[b] Central Co-operative Banks[ District Level]

[c] Primary Co-operative Societies[ Village Level]

[2] Long Term

[a] State Land Development Bank [State Level]

34
 [b] Primary Land Development Bank [District Level

In 1914 the three tier structure for co-operative banks was designed like,
primary agricultural credit societies (PACs) works at the grass root level,
central co-operative banks at the district level and state co-operative
banks at the apex level. The sources of funds for the co-operative banks
are – Central and State government, the Reserve Bank of India and
NABARD, other co-operative institutions, ownership funds and deposi-
tors and debenture holders.

2.4.2 Rajasthan State Co-operative Bank [RSCB - Apex

Bank]4

The Rajasthan State Co-operative bank is a leading and apex insti-

tution in the field of co-operative credit in Rajasthan. It was set up on 14
October 1953 to provide short and medium term co-operative credit in
the state its aim is to develop planned co-operative banking in rural are-
as. It‟s head office is at Jaipur with 5 regional offices at Udaipur, Kota,
Bikaner and Jodhpur.

In order to perform its duties, the bank has opened its branches at district
level and in major cities. With the help of its branches, bank provides fi-
nancial assistance to the farmers and other weaker section of the socie-
ties.

2.5 Review of literature

Information Technology and the Communication Networking Systems

have revolutionized the functioning of banks and other financial institu-
tions all over the world. Reserve bank of India has played an important
role in implementation of information technology in banking sector. Var-
ious researchers have also contributed in this regard. In addition to the

35
work done by various scholars in the area of Information Technology and
Banking organization, RBI had appointed various committees to work in
this area. The reports of various committees are briefly summarized be-
low:

Rangarajan Committee [1983]5

In the early 80s, a high level committee was formed under the
chairmanship of Dr. C Rangarajan, the Governor of the Reserve
Bank of India, to draw up a phased plan for Computerisation and
Mechanisation in the Banking Industry over a five year time frame
of 1985-89. The focus by this time (justifiably) was on customer
service and two models of branch automation were developed -
implemented front office mechanisation where front desk opera-
tions were computerised while back office work was done manual-
ly, back office automation covering mechanisation of General
Ledger and back office operations while the front office work was
done manually.

Both the models provided the customer with error-free accounting,

regular statements of accounts etc. Considering the contemporary
level of computerisation, these were major achievements but did
not go far enough and the pace of their implementation was tardy,
to say the least, with not a little opposition from trade unions.

Committees on Communication Network for Banks and SWIFT im-

plementation (1987)6

In 1987 a committee was formed under the chairmanship Shri T.N.A.

Iyer, (Executive Director, Reserve Bank of India). It suggested that the
computer system resources of the four IBM Mainframes (installed at the
four metros for cheque processing operations) could be made use of dur-

36
ing the day time by BANKNET for data communication with additional
equipment.

BANKNET to be implemented in two phases. In Phase I the computer

systems available in the Head Offices of the Public Sector Banks in the
four metropolitan cities would be connected to the four IBM Mainframe
servers. In the second phase connectivity could be gradually extended to
eight to ten banking intensive centers and to a hundred centers over a
three year period. The applications that were identified were:

• Inter-bank fund transfers on banks' own account and on customers' ac-

count;

• Inter-branch funds transfers on banks' own account and on customers'

account;

• Currency chest transactions;

• Government transactions;

• Improvements in payment systems by facilitating automated clear-

ing services (similar to BACS);any branch banking, etc.

The committee also suggested that, India should join the SWIFT (Society
for Worldwide Interbank Financial Telecommunication) Network for the
transmission and reception of international financial
es and BANKNET should strive to emulate SWIFT in matters of data
security, encryption, and authentication and SWIFT message standards
which are internationally accepted should be adopted by BANKNET.

Committees on Computerisation7

In 1988,again a committee was formed under the chairmanship of Dr. C.

Rangarajan, (Deputy Governor, Reserve Bank of India). The committee
recommendate that :

37
1. Computerisation of the settlement operations in the clearing houses
managed by ReserveBank of India at Bhubaneshwar, Guwahati, Jai-
pur, Patna and Thiruvananthapuram.

2. Operationalisation of MICR technology and the National Clearing

of inter-city cheques at the four metropolitan cities.

3. Introduction of one-way collection of cheques drawn on the 4 met-

ros received from Ahmedabad, Bangalore, Nagpur and Hyderabad.

4. Framing of Uniform Regulations and Rules of Clearing Houses.

5. Branch level computerisation and the establishment of connectivity

between branches.

6. Standardisation and rigorous security features to ensure an efficient

and risk free transfer of funds electronically.

7. Introduction of a single 'All Bank' credit card and advocated the

need for its widespread acceptance by merchant establishments and
usage by customers to reduce the load on cash and cheque transac-
tions.

Committee on Technology Issues Relating to Payments System,

Cheque Clearing and Securities Settlement in the Banking Industry
(1994)8

In 1994, a committee was formed under the Chairmanship of Shri

W.S.Saraf, (Executive Director, Reserve Bank of India) The committee
recommendate that :

Recommendations :

1. Establishment of an Electronic Funds Transfer (EFT) system, with

the BANKNET communications network as its carrier. The mes-
sage transfers would be in a batch mode with high value insti-
tutional funds transfers being batched every one hour and the
38
 transactions of retail customers being batched at the end of the
day. Starting with the 4 metropolitan cities, the scheme to be ex-
tended in a phased manner to all important centre.

2. MICR clearing be introduced at all centres with more than 100

bank branches. Priority should be given to centres such as Ahmed-
abad, Bangalore, Hyderabad, Pune and Surat which have relatively
large volumes.

3. Introduction of a Delivery versus Payment (DvP) system for SGL

transactions, with settlement on gross basis both for securities
transactions in PDO and funds transactions in current accounts at
DAD.

4. Introduction of Electronic Clearing Service Credit for low value

repetitive trans actions such as interest, dividend, salary, pension
payments and an Electronic Debit Clearing for payments to utility
companies.

5. A uniform size for MICR instruments.

6. Geographical expansion of the BANKNET network with nodes in

all impotant branches of banks and modifications in COMET soft-
ware to enable dial-up con-nectivity. file transfer facility, encryp-
tion etc.

7. Switch over to on-line inter-bank clearing on a gross basis.

8. Introduction of 'Clearing Bank' concept for decentralised cheque

processing.

9. Truncation of cheques upto the value of Rs.5,000/-

10. Large scale induction of computers and communication technology

in servicbranches

11. Optimal usage of SWIFT.

39
Narasimhan Committee [1998]9

In order to examine the various issues related to the technology upgrada-

tion in the banking sector, the Reserve Bank of India appointed Narasim-
han committee in September 1998. The committee consists of repre-
sentatives from the Government, Reserve Bank of India, banks and aca-
demic institutions associated with the information technology. The com-
mittee dealt with the issues on technology up-gradation and observed that
the most of the technology that could be considered suitable for India in
some form or the other has been introduced in some diluted form or as a
pilot project, but the desired success has not been achieved because of the
reasons inter-alia lack of clarity and certainty on legal issues. The com-
mittee also suggested implementation of the necessary legislative chang-
es, keeping in the view the recommendations of Shere committee. The
need for addressing the following issues was also emphasised:-

• Encryption on Public Switching Telephone Network (PSTN) lines.

• Admission of electronic files as evidence.

• Treating Electronic Funds Transfers on par with crossed cheques /

drafts for

purposes of Income Tax etc.

• Electronic Record keeping.

• Provide data protection.

• Implementation of digital signatures.

• Clarification on payment finality in case of EFT.

40
Taking into consideration the recommendations by various committees
appointed by RBI and guidelines of RBI, banks have started using IT to
automate banking transactions and processes.

Dos et al. [1993]10 studied statistical correlation between IT spending and

performance measures such as profitability or stock‟s value. It is found
that there is an insignificant correlation between IT spending and profita-
bility measures, implying thereby that IT spending is unproductive.

Brynjolfsson and Hitt [1996]11 however, cautioned that these findings

do not account for the economic theory of equilibrium which implies that
increased IT spending does not imply increased profitability. More recent
firm level studies, however, point a more positive picture of IT contribu-
tions towards productivity. These findings raise several questions about
mis-measurement of output by not accounting for improved variety and
quality and about whether IT benefits are seen at the firm level or at the
industry level.

The study conducted by Gotlieb, and Denny [1993]12 is one of the stud-
ies that deals with the impact of IT on banking productivity. Computeri-
sation is one of the factors which improves the efficiency of the banking
transactions. They concluded that higher performance levels have been
achieved without corresponding increase in the number of employees. Al-
so, it has been possible for Public Sector Banks and Old Private Banks to
improve their productivity and efficiency by using IT.

Dr. Yashwant Patil13 In India, state-owned banks spend only half a per
cent of their revenues. Though the private banks spend 4-5 per cent, they
still have a long way to go. In contrast the spending on IT by co-operative
banks especially Urban Co-operative banks in India is comparatively
very low than private banks and may end even 0.5 to 2 per cent. It is dif-

41
ficult to guess or define on the development that will take place in IT in
near future but one needs to make sure that the known technologies are
used appropriately and the vaporware in IT is ignored with proper envi-
ronmental scanning.

It is worth to mention here that Nationlised banks in India have taken

bold initiatives in deployment of new technology . The Bank of India has
recently awarded 10 years IT infrastructure outsourcing contract valued $
150 million to HP services. The State Bank of India and 7 of its associate
banks got connected their 2500 branches with $ 29 million. The Co-
operative banks are no exception in this technology race.

The Co-operative Banks of all levels viz. State , District and Co-
operative Urban banks therefore have to also ensure that technologies
are continuously updated to achieve a high degree of risk management
capability. This would require strategies that involve Asset and Liability
Management, and take care of exchange, interest rate, liquidity and op-
erational risks; these must be comparable with the prevailing standards.
In addition, co-operative banks would need to take measures to have ap-
propriate technology for access control and security the area of great con-
cern in today‟s highly competitive environment. The co-operative banks
thus have to have more attention on Information Technology deployment
with IT policies and procedures in place to guide these banks on the lines
of prevailing standards and solutions.

Jadhav Anil (2004)14 described various channels of e-banking services

such as ATM, Telephone banking (Tele-banking), Mobile banking, Inter-
net banking and its features. The focus is also given on e-banking oppor-
tunities, challenges and security aspects while performing the banking
transactions on the internet. Comparison of public, private, foreign and

42
co-operative banks and barriers to the growth of e-banking in India are
also discussed. Finally the paper discusses an overview of the major pri-
vate sector banks such as ICICI, HDFC, IDBI, UTI & GTB banks which
provides e-banking services. The author‟s observations are:

Many Indian banks are yet to make a desirable progress in implementing

the technology and gearing up to confront the challenges posed by the
rapid changes that are sweeping the banking sector globally. Private and
Foreign banks have been fast in adopting and adapting to the Internet
technology. Very few public sector banks offer Internet banking services
whereas; none of the co-operative banks offer Internet banking services.

ATM is becoming a most preferred delivery channel from the common

banking services. In order to enhance the reach to the rural population in
the remote areas, the banks will need to automate the delivery channels in
the local language which could eventually lead to shrinking of the num-
ber of branches. The banking industry‟s security is at a higher risk, due
to the advent of e-banking. The banking organizations which provide e-
banking services should take the following precautions/responsibility:

a) The Banks should hire the services of anti Cyber crime professional
to avoid cyber crime

b) To take the responsibility of customer‟s transactions

c) Create awareness of e-banking services amongst the customers and

motivate/encourage them to use it.

Kamakodi N., M Basheer Ahmed Khan,15 discussed that, it is almost 15

years since the Indian banking sector was liberalized and paradigm shift
happened in the Indian banking services. All banks have either totally
implemented „core banking systems‟ or halfway through. The results of a

43
survey, obtained from 292 respondents about their views on electronic
banking channels, indicate that the banks are exceeding the expectations
in technology based services; and their perceived service level on branch
network is below the expected levels of the respondents.

This result is in tune with the respondents‟ opinion on the perceived „gap‟
with the bank because of the introduction of technology, and on the ne-
cessity of human contact with the clients by the banks. This throws up a
challenge to banks. Technology alone cannot give a sustainable competi-
tive advantage for the banks. When all banks introduce IT, it will lose its
position as a differentiator. Beyond a point, IT along with „personal
touch‟ will be necessary for the banks to retain existing clients and to at-
tract new ones. Banks have to incorporate this in their operational strate-
gy

Gupta, Jyoti, Jain, Suman (2012),16 in there article find out the prob-
lems faced by the co-operative banks. The basic problems are:

1. The co-operative financial institution is facing severe problems which

have restricted their ability to ensure smooth flow of credit i. Limited
ability to mobilize resources. ii. Low Level of recovery. iii. High
transaction of cost. iv. Administered rate of interest structure for a
long time.

2. Due to co-operative legislation and administration, Govt. interference

has become a regular feature in the day–today administration of the
co-operative institution. Some of the problem area that arise out of the
applicability of the co-operatives legislative are: Deliberate control of
co-operatives by the government. Nomination of board of director by
the government. Participation of the nominated director by the gov-

44
 ernment. Deputation of government officials to co-operative institu-
tion etc.

3. The state co-operative banks are not able to formulate their respective
policies for investment of their funds that include their surplus re-
sources because of certain restrictions.

4. Prior approval of RBI is mandatory for opening of new branches of

SCBs. The SCBs are required to submit the proposal for opening of
new branches to RBI through NABARD, whose recommendation is
primarily taken into consideration while according permission.

They also given suggestions to sought out the problems. The sug-
gestion are as follows:

1. The banks should adopt the modern methods of banking like inter-

net banking, credit cards, ATM, etc.

2. The banks should plan to introduce new schemes for attracting new

customers and satisfying the present ones.

3. The banks should plan for expansion of branches.

4. The banks should improve the customer services of the bank to a

better extent

Balasubramanya S.(2002)17 in his study analysed that the automation

in the banking sector has come a long way starting with the Rangara-
jan Committee report on the banking sector reforms during the eight-
ies, followed by reports of the Narasimhan Committee in the nineties.
With over 65,000 branches of the banks (public, private and the co-
operative sector) in the country, the author found that the percentage
of branches 62 covered by automation was very low.

45
Though many banks had claimed that more than 70% business has
been automated due to the enforcement of RBI guidelines, in reality it
was much lower, as many functions in each branch were still done
manually or with partial automation. Hence, there was a significant
amount of automation work to be achieved in the banking sector

Rajshekhara K. S. (2004)18 described the adoption of IT in banking

has undergone several changes with the passage of time. Today IT has
become an inseparable segment of banking organization. The applica-
tion of information technology in the banking sector resulted in the
development of different concepts of banking such as – E-banking, In-
ternet Banking, Online Banking, Telephone Banking, Automated
teller machine, universal banking and investment banking etc. Infor-
mation technology has a lot of influence on banking transactions. It
ensures quick service with low transaction cost to the customers.

The real success of IT in the banking sector depends upon the custom-
er‟s satisfaction. Therefore banks should organize and conduct cus-
tomer awareness program in their service area. Security is an im-
portant issue in the context of E-banking. The development of tech-
nology for the identification of customers with different means of
communication devices is a must for successful business and also to
reduce frauds in banking. In this paper the author has studied customer
related aspects only. This paper do not present any study related to the
bank employees and their problems regarding bank computerisation.

5. The banks should improve the customer services of the bank to a

better extent

46
T.S. Devaraja19 in his study analysed the working of the bank in certain
vital areas such as share capital, credit business recovery performance,
overall profitability and economic viability

Y. Venu Gopala Rao20 in his article, emphasised the significance of

funds management in co-operative banks in the context of globalisation,
liberalization and privatisation of the financial system, consequent upon
the implementation of Narasimham Committee recommendations.

He pointed out that co-operative banks required a new approach for

achieving higher productivity and profitability in the context of the open-
ing of economy, application of prudential norms and deregulation of in-
terest rates. The new approach should lay emphasis on moblisation of re-
sources at reasonable cost and deployment of funds at required yield so as
to enlarge the interest spread and profitability

D. Ganeshwar Rao21 in his article reiterated that the work technology

needed to be improved in co-operative banks both as a measure of effi-
ciency of operations, economy in expenditure and improvement in cus-
tomer service.

The major changes developed in the banking sector after the nationaliza-
tion was studied by Ghosh (1979)22and focused that many improvements
had happened in the case of Deposit mobilization, lending pattern and op-
erational efficiency of banks.

The study conducted by Vij Madhu (2003)23 presents the changing pro-
file of Indian banks with the help of a comparative study of three private
sector banks in India namely ICICI bank, HDFC bank and IDBI bank.

The comparative analysis of the three private sector banks shows that
HDFC stands out as a clear winner with ICICI at number two. In the

47
study the researcher concludes that the challenge for the future will be the
synergetic use of internet, proper understanding, measuring of risk man-
agement as also nurturing and retaining the intellectual capital. The au-
thor suggested the following strategies that need to be focused on:

• Develop and innovate new products so as to widen customer base

• Strategic alliances

• Setting up of an effective software system for ALPM

Edwinraj (2005)24 described the role of information technology in co-

operative banks. The information technology in co-operative banks plays
a significant role in establishing and maintaining contact with potential
customers. Rapid developments in communication and network system
are set to change the operational environment of co-operative banks. An
effective and efficient management information system (MIS) can make a
major impact on deposits, loans and other services provided by co-
operative banks.

Technological innovations, both internal and external, brought about

changes in co-operative banks. Its adoption has resulted in development
of e-banking, on-line banking internet banking, telephone banking and
automated teller machine. Co-operative banks shall have to change their
vision, mission, strategy and governance in the context of information
technology. Information technology has a lot of influence on co-operative
banks and it will help them to face competition and new challenges to
meet customer‟s expectations in the context of globalization and structur-
al readjustment.

48
Radhakrishna Geeta and Pointon Leo25 examined the legal issues spe-
cific to internet banking, focusing on the incidence of fraud and its prose-
cution.

The objective of research was to investigate three questions in relation to

Malaysia. Firstly, the incidence of fraud in internet banking; secondly, the
adequacy of the relevant regulations and statutes; and thirdly, whether the
setting up of a cyber court would better facilitate the prosecution of such
financial crimes in Malaysia. Technology and the borderless nature of the
internet present fraudsters with manifold opportunities. „Phishing‟ leads
to identity theft and „money laundering‟ has been found to be the main
threat to internet banking.

The newness of the subject and traditional banking secrecy have contrib-
uted to a dearth of legal literature pertaining to issues in internet banking,
specific to Malaysia. It was found that the applicability of various exist-
ing laws and banking practices to internet banking has not been fully
tested in Malaysia and is still evolving

Devdatta A., Divekar(2011)26 in his article analyzed that rural credit

structure in India comprising SCBs(State Co-operative Banks),
DCBs(Distric Co-operative Banks), PACs(Primary Agriculture credit so-
cieties) is important component of Indian financial system. Compared to
commercial banks, these banks are by and large far behind in adoption of
technology and providing innovative/customer friendly services. Timely
compliance to regulatory agency requirements is also a major area of
concern for these banks.

This is a high time for these banks to take strategic decision to introduce
CBS( Core Banking System) to enable themselves to survive in today‟s
competitive business environment. If option to implement common soft-

49
ware solution by all DCBs and SCB of respective state works out then
that would be most preferred choice if that is not possible due to any rea-
son than individual bank needs to take such decision and move forward as
early as possible.

D. Ganeshwar Rao27 in his article, “Work Technology of Co-operatives

reiterated that the work technology needed to be improved in co-operative
banks both as a measure of efficiency of operations, economy in expendi-
ture and improvement in customer service.

Parua Anupam and Joshi Lalit Kumar (2010)28,in their research paper
titled “Trends in Performance and Profitability of Co-Operative Banks: A
Case Study of Vidyasagar Central Co-operative Bank Limited, Midna-
pore, West Bengal”, have identified that the major reasons that for de-
clining profitability of the bank. They are:

· Slower rate of increase in bank‟s spread ratio in comparison to the bur-

den ratio.

· Bank is inefficient in capturing new and different channels of banking

business.

· The presence of non-performing assets has also posed a great problem

for the bank.

· As the regime of interest rate cut was prevalent at that time, thus the
banking operations were bound to suffer from profitability perspectives.

Paduval (1991)29 discusses the Indian experience of liberalization during

last two decades and likely scenario in the next decade. He observed that
the past two decades showed that growth of financial system was charac-
terized by active state intervention as with a view to building up of insti-
tutional infrastructure.

50
However a marketing approach has to be adopted to face the challenges
of management arising due to high degree of diversification. To face this,
banking system should be made financially strong.

Rajagopala Rao30 studied the strengths and weaknesses of customer's

services in urban co-operative banks and made several suggestions. He
examined the experience and expectations of the member of an urban co-
operative bank, the current facilities availed by the members and the rea-
sons for their happiness and unhappiness of the services provided by the
bank.

Strength of urban co-operative banks included effective board of man-

agement, efficient employees, cordial personalized services, proper guid-
ance, provision of loan facilities, computerization, prompt services, good
work culture and convenient timings. Among the important weakness ab-
sence of enquiry counter, absence of computerized services, absence of
display boards, cumber some procedure, inefficient employees, indiffer-
ent attitude of employees, inconvenient timings, insufficient bank branch-
es, delay in services, lack of new schemes were found.

He concluded by stating that with the competition in banks becoming

fierce, not only winning new customers, but also retaining the existing
customers assumes great significance. So urban co-operative banks
should equip themselves to meet the challenges and their future depends
on their capability to provide better services in terms of variety, quality
and cost. So their success lies in democratic management, dedicated, en-
lightened and committed leadership, adoption of new technology and de-
votion of employees

Dr. Vijay Singh Hooda [2014]31 analyzed financial institutions like

banks can be more sound by achieving high level of productivity.

51
Financial sector reforms focus greatly on improving efficiency and
productivity. In co-operative banking system, DCCBs have great signifi-
cance. They have played and will play very important role in socio-
economic development of the society. They are very common insti-
tutions among co-operative credit institutions in India.

The study finds that employees of DCCBs have been working effi-
ciently for improving the productivity of their respective banks con-
sistently Further it is found that branch-wise productivity of the banks
have been increased with good growth rate. But, employee-wise produc-
tivity has been increased with higher rate than that of branch wise
reference period. Here, for employee productivity only business per
employee an indicator and for representing branch wise productivity-
business per branch have been considered. It concludes that there is
perfect positive relationship between labour productivity and branch
productivity achieved by all DCCBs together for the time-

It may be said here that providing employment opportunities has been

found more beneficial than opening branches by DCCBs during the
study. It is happened when number of employees is showing decreasing
trend. So, it may be said that employees of DCCBs have worked ef-
ficiently and effectively. It may be suggested that DCCBs should appoint
more human resource for their growth and sustainability because it would
be beneficial to DCCBs and there is great and significant association
between labour productivity and branch production in both absolute term
growth rate-wise. i.e. when labour productivity increases, productivity
of that branch definitely will enhance. DCCBs need to provide some
more impressive benefits to their employees and renovate their
branches to make them attractive. Particularly, they are considered real

52
friends by the farmers in India. So, they should greatly emphasize on the
requirements of that strata of the society.

But, they have also been facing some problems like dual control, lack of
professionalism, low level of technology and less focus on holding train-
ing and development programmes for their employees. The need of the
time is that government should see the co-operative banking model as a
suitable structure for achieving the goals of financial inclusion. This sys-
tem would be economical and provide results quickly if it is moni-
tored properly and the role of DCCBs will be very impressive for
the same.

Gulati V. P. [29]32 listed the following possible applications that can be

easily complimented by the Indian financial sector.

• Quick disposal of loan/investment proposal

• Forex information from branches to the office dealing with forex

• Fund information from clearing centers to the fund management of-

fice for optimal allocation of funds

• Inter-branch inter bank reconciliation

• Fund transfer/payment messages (EFT/EDI) (intra-bank and inter-

bank)

• E-mail

• Organisational bulletin boards may contain the following: circulars,

undesirable arties, hot list, bulletins, missing security items, confiden-
tial circulars on attempted frauds

• Organisational/customers database may include statutory returns,

control returns, standardised returns, adhoc reports
53
• Banks-corporate customers connectivity

• Management information systems: Borrower‟s profile; Branch pro-

file; employee‟s analysis; products/services profile; business profile
of branches

• Banks owned ATM/credit-debit card and other applications on the

financial network

Uppal R. K.33 described that in the post-LPG (Liberalization, Privatiza-

tion and Globalization) era and Information Technology (IT) era, trans-
formation in Indian banks is taking place with different parameters and
the curves of banking services are dynamically altering the face of bank-
ing, as banks are stepping towards e-banking from traditional banking.

The paper empirically analyzes the quality of e-banking services in the

changing environment. With different statistical tools such as weighted
average method and ranking.The paper concludes that most of the cus-
tomers of e-banks are satisfied with the different e-channels and their ser-
vices, but the lack of awareness is a major obstacle in the spread of e-
banking services. The paper also suggests some measures to make e-
banking services more effective in the future.

Dr. Akula Rajagopala Rao34 mainly focused to examine the reasons for
employees of urban co-operative banks in Bangalore city for joining in
urban co-operative banks, to inquire into the belief of the employees of
urban co-operative banks in co-operative ideology and their outlook to-
wards co-operative philosophy and to find out the existing and expecting
facilities in urban co-operative banks. He concluded that there is an im-
mediate need to improve profitability and productivity of urban co-
operative banks. Cost efficiency ratio may be computed and used.

54
Mittal R. K. and Dhingra Sanjay35 discussed the issue that the transac-
tion through technology channels cost much less to the banks than the
customers reaching the bank and doing the transactions. In the last decade
banks have invested heavily in the technology. In the use of information
technology, the new private and foreign sector banks have taken lead over
the public and old private sector banks.

Today public sector banks are also investing heavily in technology to

compete with the new private and foreign sector banks. In the study au-
thors have identified the different technology issues and challenges such
as choice of right channel, justification of IT investment in terms of ROI
(Rate of Interest), e-governance, customer relationship management, se-
curity concerns, penetration of IT in rural areas etc. Banks are required
to address these issues and challenges effectively to stay in business and
grow.
36
Ananthakrishnan G. (2005) described customer‟s services in the
banks. The discriminating customer‟s expectations have begun to change
in terms of quality and service. With the advent of computers and ATMs,
the gap between the customers and the banking personnel is widening.
Unless a change of heart occurs, even the largest banks will find it hard to
survive on their assumed false glory. Banks which take care to see the
reality and react early will survive and prosper, while those who continue
the traditional path will find their market share eaten away.

Nowadays customers are no longer willing to wait in long queues or tol-

erate arrogant behaviour of the employees. As applicable to banking,
“customer service” may be defined as the ability to satisfy the customer‟s
requirements and needs to the fullest extent and be able to replicate this
on an on-going basis. The four factors for ensuring customer service are:

55
• What satisfies the customer?

• Devising quantifiable determinants.

• Continually monitoring and improving these parameters.

• Seeking customer feedback to ensure alignment with customer needs.

These four approaches can go a long way in helping the banks to achieve
its quality goals.

Customers, who are central to the banking service, are not a homogene-
ous class. They come from varying socio-economic and cultural back-
grounds. Their perception about the banking services is so dynamic that it
may differ from customer to customer and even for the same customer at
different points of time, depending on their mood and mind-set. Success-
ful banking relationships are formed at a human level. Factors which help
in retaining the existing customers are:-

• Past experiences with the bank.

• Familiarity with the services offered by the bank and simplified pro-
cedures.

• Knowledge of or experience with competitor‟s products and services.

• Brand image-banking with a particular bank is regarded as a status

symbol.

• Overall ambience at the bank premises.

• Extra services or value addition provided by the bank.

In this article the author also studied the factors which irk (trouble) the
customers and

56
they are:

• Poor service attitude

• Long queues

• Inability of the bank to meet customer needs

• Lack of proper ambience

• Lack of humility that prevents banks from meeting customer needs

Author also mentioned that by adhering to the following factors custom-

er‟s complaints could be avoided:

• Prompt collection of cheques

• Faster payment/receipts in cash counter

• Positive attitude of the counter staff

• Proper adherence to the standing instructions to the customers

• Correct crediting of interest on deposit accounts and avoiding fraudu-

lent withdrawals

• Timely honouring of invoked LCs, guarantees, etc.

• Seeking only required documents for processing loan applications

• Timely sanctioning of loans at reasonable market related interest rates.

Soyeliya Usha L37described various problems faced by co-operative

banks:

The co-operative financial institution is facing severe problems which

have restricted their ability to ensure smooth flow of credit

A. Limited ability to mobilize resource

57
 B. Low Level of recovery.

C. High transaction of cost.

D. Administered rate of interest structure for a long time.

Due to co-operative legislation and administration, Govt. interference has

become a regular feature in the day–to-day administration of the co-
operative institution. Some of the problem area that arises out of the ap-
plicability of the co-operatives legislative are :

- Deliberate control of co-operatives by the government. Nomination of

board of director by the government. Participation of the nominated
director by the government. Deputation of government officials to co-
operative institution etc.

- The state co-operative banks are not able to formulate their respective
policies for investment of their funds that include their surplus re-
sources because of certain restrictions

- Prior approval of RBI is mandatory for opening of new branches of

SCBs. The SCBs are required to submit the proposal for opening of
new branches to RBI through NABARD, whose recommendation is
primarily taken into consideration while according permission.

The author also suggested remedial measures :

- The banks should adopt the modern methods of banking like internet
banking, credit cards, ATM, etc

- The banks should plan to introduce new schemes for attracting new
customers and satisfying the present ones.

58
- The banks should plan for expansion of branches

- The banks should improve the customer services of the bank to a bet-
ter extent.

The study conducted by Kunkalienkar Manoj38 presented that though

technology is a revolutionary agent, it will not be a cure for all inefficien-
cies. The main area of awareness for banks is going to be the re-skilling
of the workforce, both in technology and non-technology areas. One of
the major areas where re-skilling is needed is in the area of customer ser-
vice and customer focus; how to manage customer expectation, his feed-
back; how to attract new profitable customers; how to package products
and services to meet customer needs, create a hygienic branch environ-
ment and other contact points. Another major need is to ensure consistent
customer experience, irrespective of the channel used for interaction
with him.

Added to this is the security across all channels and distribution points
for customer information and transactions. While technology may not be
a cure-all, it is definitely an enabler. The tool has to be used efficiently
and effectively to originate maximum benefits. This will definitely be a
differentiator to offer products and services.

Review of literature shows that different researchers and experts in the

fields of banking have discussed various aspects of the bank computerisa-
tion like technology and Indian banking sector, channels of e-banking,
technological revolution in banking sector, IT channels and customer ser-
vice etc. It has been observed that none of the reviewed study addresses
the issues such as technological developments (extent of computerisa-
tion) of co-operative banks, different aspects affecting the development of
co-operative banks, problems and prospects of bank computerisation, re-

59
sponses of the employees and customers on bank computerisation, Hence,
there is a visible gap in the academic contribution on the subject and the
present study is an attempt to fill the gap in this area.

60
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