On March 14, 2022 Rajya Sabha discussed the working of the Ministry of Development of North Eastern Region (DoNER).  During the discussion, several issues around budgetary allocation, implementation of schemes and connectivity with the North Eastern Region were discussed.  The Ministry of DoNER is responsible for matters relating to the planning, execution and monitoring of development schemes and projects in the North Eastern Region.  In this blog post, we analyse the 2022-23 budgetary allocations for the Ministry and discuss related issues.  

A new scheme named PM-DevINE announced to boost infrastructure and social development

In 2022-23, the Ministry has seen a 5% increase in allocation from the revised estimates of 2021-22.  The Ministry has been allocated Rs 2,800 crore which will be used for various development schemes, such as the North East Special Infrastructure Development Scheme and North East Road Sector Development Scheme.  A scheme-wise break-up of the budget allocation for the Ministry is given below in Table 1.  

One of the key highlights of the Finance Minister’s Budget Speech was the announcement of a new scheme named the Prime Minister’s Development Initiative for North East (PM-DevINE).  It will be implemented through the North East Council (nodal agency for the economic and social development of the North Eastern Region).  PM-DevINE will fund infrastructure and social development projects in areas such as road connectivity, health, and agriculture.  The scheme will not replace or subsume existing central sector or centrally sponsored schemes.  The Scheme will be given an initial allocation of Rs 1,500 crore.

Table 1: Break-up of allocation to the Ministry of DoNER (in Rs crore)

Major Heads

2020-21 Actuals

2021-22 BE

2021-22 RE

2022-23 BE

% change from 2021-22 RE to 2022-23 BE

North East Special Infrastructure Development Scheme

446

675

674

1,419

111%

Schemes of North East Council

567

585

585

702

20%

North East Road Sector Development Scheme

416

696

674

496

-26%

Central pool of resources for North East and Sikkim

342

581

581

-

-

Others

270

322

344

241

-30%

Total

1,854

2,658

2,658

2,800

5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note: BE – Budget Estimate; RE – Revised Estimate; Schemes for North East Council includes Special Development Projects.

Sources: Demand No. 23 of Union Budget Documents 2022-23; PRS. 

Allocation towards capital outlay less than demand

The Standing Committee on Home Affairs (2022) noted that the amount allocated at the budget stage in 2022-23 (Rs 660 crore) was 17% less than the demand by the Ministry (Rs 794 crore).  Capital expenditure includes capital outlay which leads to the creation of assets such as schools, hospitals, and roads and bridges.  The Committee observed that this may severely affect the implementation of several projects and schemes that require capital outlay.  It recommended the Ministry to take up this matter with the Finance Ministry and demand additional assistance at the revised stage of the 2022-23 financial year.

Underutilisation of funds over the years

Since 2011-12 (barring 2016-17), the Ministry has not been able to utilise the funds allocated to it at the budgeted stage (See Figure 1).  For instance, in 2020-21, fund utilisation in case of the North East Road Sector Development Scheme was 52%, whereas only 34% of funds were utilised under the North East Special Infrastructure Development Scheme (for infrastructure projects relating to water supply, power, connectivity, social infrastructure).  Key reasons for underspending highlighted by the Ministry include late receipt of project proposals and non-receipt of utilisation certificates from state governments.

Figure 1: Underutilisation of funds by the Ministry since 2011-12

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 Note: Revised Estimate has been used as the Actual Expenditure for 2021-22.
 Sources: Union Budget Documents (2011-12 to 2022-23); PRS
.

Delay in project completion

The Ministry implements several schemes for infrastructural projects such as roads and bridges.  The progress of the certain schemes has been inadequate.   The Standing Committee (2022) observed that the physical progress of many road sector projects under the North East Road Sector Development Scheme is either at zero or in single digit percent in spite of release of the amount for the project.  Similarly, projects under the Karbi Anglong Autonomous Territorial Council (autonomous district council in Assam) and Social and Infrastructure Development Fund (construction of roads, bridges, and construction of schools and water supply projects in the North Eastern Region) have seen inadequate progress.

Need to address declining forest cover

The Standing Committee (2021) has also recommended the Ministry of DoNER to work towards preserving forest cover.  The Committee took note of the declining forest cover in the North East India.  As per the India State of Forest Report (2021), states showing major loss of forest cover from 2019 to 2021 are: (i) Arunachal Pradesh (loss of 257 sq km of forest cover), (ii) Manipur (249 sq km), (iii) Nagaland (235 sq km), (iv) Mizoram (186 sq km), and (v) Meghalaya (73 sq km).  The loss of forest cover may be attributed to shifting cultivation, cutting down of trees, natural calamities, anthropogenic (environmental pollution) pressure, and developmental activities.  The Committee recommended that various measures to protect the forest and environment must be given priority and should implemented within the stipulated timeline.  It also suggested the Ministry to: (i) carry out regular plantation drives to increase forest cover/density, and (ii) accord priority towards the ultimate goal of preserving and protecting the forests under various centrally sponsored initiatives.

Key issues raised by Members during discussion in Rajya Sabha

The discussion on the working of the Ministry of DoNER took place in Rajya Sabha on March 14, 2022.  One of the issues highlighted by members was about the Ministry not having its own line Department.  This leads to the Ministry being dependent on the administrative strength of the states for implementation of projects.  Another issue highlighted by several members was the lack of connectivity of the region through railways and road networks which hampers the economic growth of region.  The DoNER Minister in his response to the House assured the members that the central government is making continuous efforts towards improving connectivity to the North East region through roads, railways, waterways, and telecommunication.         

Allocation by Union Ministries to the North East 

Union Ministries allocate 10% of their budget allocation for the North East (See Figure 2 for fund allocation and utilisation).  The Ministry of DoNER is the nodal Ministry that monitors and keeps track of the allocation done by various Ministries.  In 2022-23, Rs 76,040 crore has been allocated by all the Ministries for the North Eastern region.  The allocation has increased by 11% from the revised estimate of 2021-22 (Rs 68,440 crore).   In 2019-20 and 2021-21 the actual expenditure towards North Eastern areas was lower than budget estimates by 18% and 19% respectively.  

Figure 2: Budgetary allocation by all Union Ministries for the North East (amount in Rs crore)

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Source: Report No. 239: Demand for Grants (2022-23) of Ministry of Development of North Eastern Region, Standing Committee on Home Affairs; PRS.

Last month, Reserve Bank of India (RBI) released the report of the Expert Committee on Urban Co-operative Banks (Chair: Mr. N. S. Vishwanathan).  In this blog, we discuss some broader issues with the functioning and regulation of urban co-operative banks (UCBs), and some of the suggestions to address these as highlighted by the committee in its report.

Need for Urban Co-operative Banks

The history of UCBs in India can be traced to the 19th century when such societies were set up drawing inspiration from the success of the co-operative movement in Britain and the co-operative credit movement in Germany.  Urban co-operative credit societies, were organised on a community basis to meet the consumption-oriented credit needs of their members.  UCBs are primary cooperative banks in urban and semi-urban areas.  They are co-operative societies that undertake banking business.  Co-operative banks accept deposits from the public and lend to their members.  Co-operative banks are different from other co-operatives as they mobilise resources for lending and investment from the wider public rather than only their members.

Concerns regarding the professionalism of urban cooperative banks gave rise to the view that they should be better regulated.  Large cooperative banks with paid-up share capital and reserves of one lakh rupees were brought under the scope of the Banking Regulation Act, 1949 with effect from March 1, 1966.  Prior to this, such banks were regulated under the scope of state-specific cooperative laws.  The revised framework brought them under the ambit of supervision of the RBI.  Till 1996, these banks could lend money only for non-agricultural purposes.  However, this distinction does not apply today.  

The Expert Committee noted that UCBs play a key role in financial inclusion.  It further observed that the focus area for UCBs has traditionally been communities and localities including workplace groups.  They play an important role in the delivery of last-mile credit, even more so for those sections of the population who are not integrated into the mainstream banking framework.  UCBs primarily lend to wage earners, small entrepreneurs, and businesses in urban and semi-urban areas.  UCBs can be more responsive than formal banking channels to the needs of the local people.

Over the years, concerns have been raised about non-professional management in UCBs and that this can lead to weaker governance and risk management in these entities.  RBI has also taken regulatory action on several UCBs.  For instance, in September 2019, RBI placed Punjab and Maharashtra Co-operative Bank under restrictions on allegations of serious underreporting of non-performing assets.  The bank could not grant loans, make investments or accept deposits without prior approval from RBI.  While these restrictions were originally put in place for six months, the time frame was extended several times and has now been extended till December 31, 2021.  In addition, low capital base, poor credit management and diversion of funds have also been issues in the sector.

Shrinking share in the banking sector

There were 1,539 UCBs in the country as of March 31, 2020, with deposits worth Rs 5,01,180 crore and advances worth Rs 3,05,370 crore.   Even though 94% of the entities in the banking sector were UCBs their market share in the banking sector has been low and declining and stands at around 3%.  UCBs accounted for 3.24% of the deposits and 2.69% of the advances in the banking sector.  The Committee noted that state-of-the-art technology adopted by new players, such as small finance banks and fintech entities, along with commercial banks can disrupt the niche customer segment of the UCBs.

Figure 1:  Growth in deposits of UCBs (in Rs crore)
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Source: Report of the Expert Committee on Urban Co-operative Banks; PRS.

Figure 2:     Growth in advances of UCBs (in Rs crore)
 
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Source:  Report of the Expert Committee on Urban Co-operative Banks; PRS.

Burden of non-performing assets

UCBs had the highest net non-performing asset (NNPA) ratio (5.26%) and gross non-performing asset (GNPA) ratio (10.96%) across the banking sector as of March 2020.  These levels correspond to around twice that of private sector banks, and around five times that of small finance banks.  The Committee noted that, as of March 2020, UCBs have the lowest level of net interest margin (difference between interest earned and interest spent relative to total interest generating assets held by the bank) and negative return on assets and return on equity. 

Figure 3: Asset quality across banks (in percentage)

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Sources:   Report of the Expert Committee on Urban Co-operative Banks; PRS.

Supervisory Action Framework (SAF):  SAF envisages corrective action by UCB and/or supervisory action by RBI on breach of financial thresholds related to asset quality, profitability and level of capital as measured by Capital to Risk-weighted Asset Ratio (CRAR).  The Committee recommended that SAF should consider only asset quality (based on net non-performing asset ratio) and CRAR with an emphasis on reducing the time spent by a UCB under SAF.  The RBI should begin the mandatory resolution process including reconstruction or compulsory merger as soon as a UCB reaches the third stage under SAF (CRAR less than 4.5% and/or net non-performing asset ratio above 12%).

Constraints in raising capital

The Committee also observed that UCBs are constrained in raising capital which restricts their ability to expand the business.  According to co-operative principles, share capital is to be issued and refunded only at face value.  Thus, investment in UCBs is less attractive as it does not lead to an increase in its value.   Also, the principle of one member, one vote means that an interested investor cannot acquire a controlling stake in UCBs.  It was earlier recommended that UCBs should be allowed to issue fresh capital at a premium based on the net worth of the entity at the end of the preceding year.

Listing of securities:  The Committee recommended making suitable amendments to the Banking Regulation Act, 1949 to enable RBI to notify certain securities issued by any co-operative bank or class of co-operative banks to be covered under the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992.  This will enable their listing and trading on a recognised stock exchange.   Until such amendments are made, the Committee recommended that banks can be allowed to have a system on their websites to buy/sell securities at book value subject to the condition that the bank should ensure that the prospective buyer is eligible to be admitted as a member.   

Conflict between Banking Regulation Act, 1949 and co-operative laws 

The fundamental difference between banking companies and co-operative banks is in the voting rights of shareholders.  In banking companies, each share has a corresponding vote.  But in the case of co-operative banks, each shareholder has only one vote irrespective of the number of shares held.  Despite RBI being the regulator of the banking sector, the regulation of co-operative banks by RBI was restricted to functions related directly to banking.  This gave rise to dual regulation with governance, audit, and winding-up related functions regulated by state governments and central government for single-state banks and multi-state banks, respectively.  

2020 Amendments to the Banking Regulation Act: In September 2020, the Banking Regulation Act, 1949 was amended to increase RBI’s powers  over the regulation of co-operative banks including qualifications of management of these banks and supersession of board of directors.  The Committee noted that due to the amendment of the Act, certain conflicts have arisen with various co-operative laws.  For instance, the Act allows co-operative banks to issue shares at a premium, but it is silent on their redemption.  It noted that if any co-operative societies’ legislation provides for redemption of shares only at par, then, while a co-operative bank incorporated under that legislation can issue shares at a premium, it can redeem them only at par.   

Note that on September 3, 2021, the Madhya Pradesh High Court stayed a circular released by the RBI on appointment of managing director/whole-time director in UCBs.  The circular provided for eligibility and propriety criteria for the appointment of such personnel in UCBs.  The petitioner, Mahanagar Nagrik Sahakari Bank Maryadit, argued that the service conditions of the managing director and chief executive officer of co-operative banks are governed by bye-laws framed under the M.P. State Cooperative Societies Act, 1960.  The petition noted that co-operative as a subject falls under the state list and hence the power to legislate in the field of co-operative societies falls under the domain of the states and not the central government.


Umbrella Organisation

Over the years, several committees have looked at the feasibility to set up an Umbrella Organisation (UO) for UCBs.  It is an apex body of federating UCBs.  In 2011, an expert committee on licensing of new UCBs recommended that there should be two separate UOs for the sector.  In June 2019, RBI granted an in-principle approval to National Federation of Urban Co-operative Banks and Credit Societies Ltd to set up a UO in the form of a non-deposit taking non-banking finance company.  The UO is expected to provide information technology and financial support to its federating members along with value-added services linked to treasury, foreign exchange and international remittances.   It is envisaged to provide scale through network to smaller UCBs.  The report of the current Committee recommended that the minimum capital of the UO should be Rs 300 crore.  Once stabilised, the UO can explore the possibility of becoming a universal bank.  It can also take up the role of a self-regulatory organisation for its member UCBs.  The Committee also suggested that the membership of the UO can be opened-up to both financial and non-financial co-operatives who can make contributions through share capital in the UO.

Comments on the report of the Expert Committee are invited until September 30, 2021.