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Evaluating and Mapping The Indian

Urban Co-operative Banking Sector

for Better Survival

Ms Geeta Sharma, Faculty, IIPS,Devi Ahilya Vishwavidyalaya,Indore (MP), India

Dr Ganesh Kawadia, Head, Department of Economics, Devi Ahilya Vishwavidyalaya , Indore (MP), India

(A study of cooperative banks of Indore division)

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An overview Introduction

Objectives

An overview of Urban Co-operative Banks

Methodology

Results

Conclusion

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Introduction…. The Urban Co-operative banking system is a

unique sector, blending-banking and cooperation.

The market driven economy of India, is today posing stiff competition for all traditional institutions like cooperative banks through deployment of more capital, advanced technology and skilled human resources.

Despite showing a sustained growth, the sector has gone through a lot of turmoil in the last few years.

There is an apprehension as to whether these entities will be able to survive in an increasing competitive environment.

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…. Introduction

In such a competitive environment the sector has to be more efficient to survive.

It is therefore imperative to judge their relative performance and understand the best practices for better survival.

Hence in present study, relative efficiency of urban cooperative bank is investigated applying “Data Envelopment Analysis” considering a panel data set of cooperative banks of Indore division.

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Objectives

To measure and compare the efficiency of the Urban Cooperative Banks (UCBs) of Indore, using Data Envelopment Analysis (DEA), and to decompose the same into PTE and SE for the purpose of categorizing the sample banks as efficient and less efficient banks.

To study the impact of ‘size’ on the efficiency of the Urban Cooperative Banks .

To suggest the appropriate measures to improve the efficiency of the cooperative banks.

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An overview of urban co-operative banks ….

Indian UCB sector plays an important role in meeting growing banking needs of urban and semi urban areas of the country.

Urban co-operative banks are regulated and supervised by both, the State Governments, through the Registrars of Co-operative Societies, and by the Reserve Bank of India.

The financial health of these institutions has under pressure from their historic poor capitalization, low margins, high transaction costs, excessive state government control and a lack of professional management.

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4.504.9 5.3 5.6

6.6 6.3 6.4 6.35.8

5.34.8

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2

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6

8

End-FY96

End-FY97

End-FY98

End-FY99

End-FY00

End-FY01

End-FY02

End-FY03

End-FY04

End-FY05

End-FY06

Mar

ket s

hare

of d

epos

its in

%

.

Market Shares Of Deposits of UCBs(%)

…Urban Co-operative Banks of India

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…urban co-operative banks of India

Growth Of Urban Cooperative Banks (UCBs) (Amounts in crores of

rupees)

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Urban Co-operative Banks of Indore…

Situated in the heart of MP, the Indore division is an important place in the overall financial fabric of Madhya Pradesh.

Since 1916, the cooperative banks of the Indore division have been playing an important role in the socio-economic development of the division.

Presently, in the Indore division, twenty two UCBs are catering to the banking needs of the urban and semi urban population of more than 1 crore.

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Urban Co-operative Banks of Indore

UCBs of Indore division show similar characteristics as that of the UCBs across the country - they are highly heterogeneous in terms of deposits, advances,total assets and membership size.

The deposits levels vary in the range of Rs 43.96 to 10045.65 lacs whereas the advances vary between Rs 32.86 to 5123.14 lacs.

Taking a view on the crisis faced by the sector time and again the RBI has identified unviable UCBs. In the last one year the RBI has taken a harsh action to terminate the operations of three UCBs of Indore division.

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Methodology

Efficiency is measured by the ratio of output to input, where a larger value of this ratio indicates better performance.

The performance of a bank is conceptualized as the extent to which the bank is able to utilize its resources to generate business transactions and it is measured by an efficiency ratio.

The Efficiency of a Banking Institution

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Methodology

We have considered Technical Efficiency (TE) for analyzing the performance of the banks.

TE refers to the relationship between scarce factor inputs and outputs of goods and services.

The Efficiency of a Banking Institution

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The DEA Model.

Data Envelopment Analysis (DEA) is a linear programming application used to determine the relative efficiency for a set of homogenous Decision Making Units.

Charnes, Cooper and Rhodes (1978) first developed the DEA approach based on the concept of technical efficiency of Farrel (1957).

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The DEA Model..

DEA is a very useful technique where the presence of multiple inputs and outputs makes comparison difficult such as banks, schools and hospitals.

In our study each Urban Co-operative Bank is a DMU.

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The DEA Model…

DEA creates a fictitious composite bank made up of an optimal weighted average inputs and outputs of existing banks.

An individual bank’s input resources and output generated is compared to this composite bank.

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The DEA Model…

DEA identifies the most efficient banks in a population and provides a measure of inefficiency for all others.

The most efficient banks are rated to have an efficiency score of 1 while the less efficient banks have a score between 0 and 1.

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DEA Model…. DEA is able to decompose Technical

Efficiency (TE) into Pure Technical Efficiency (PTE) and Scale Efficiency (SE).

Scale efficiency is that component of Technical Efficiency that can be attributed to the size of operation.

Whereas Pure Technical Efficiency is the effective implementation of the production plan in converting input to output.

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Inputs-Outputs for UCBs and The DEA Model

INPUTS

•Interest Paid•Operating Expenses

OUTPUTS

•Deposits•Advances•Net Profit•Interest received

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Inputs-Outputs for UCBs and The DEA Model

The choice of input-output variables in the present study is primarily guided by the value added approach (Berger and Humphrey, 1992; Berg et al,1993; Grifell-Totje and Lovell,1996; Kumbhakar and Sarkar,2003)

In the value added approach the identification of inputs or outputs is based on the share of value added.

Items of balance sheet and profit and loss account with a substantial share of value added are considered.

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Data….

We have selected UCBs of the Indore division(Madhya Pradesh) for defining and selecting the inputs and outputs.

At present twenty-two UCBs operate in the Indore division. The empirical model is estimated using data of nineteen UCBs.

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….Data

We have considered a four year financial year end data set from 2002 to 2005.

The data has been obtained from the audited balance sheets and profit and loss statements which were directly collected from the concerning banks.

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Empirical Results….

In our study DEA analysis is done by using DEAP Version 2.1 Computer Program, by Tin Coelli.

It has been observed that the Pure Technical Efficiency of Urban Co-operative Banks of Indore during the period under consideration has shown a decreasing trend.

A similar trend is observed in the case of Scale Efficiency.

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Empirical Results….

Technical Efficiency, Pure Technical Efficiency and Scale Efficiency Trend over FY Ending 02, 03, 04 and 05

70%

75%

80%

85%

90%

95%

100%

2002 2003 2004 2005

As at FY Ending

Effi

cie

ncy

Technical Eff iciency Pure Technical Eff iciency Scale Eff iciency

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Empirical Results…. Based on the PTE scores we categorized the

sample banks into two groups: Efficient bank group Less efficient bank group

End FY 2002- No. of efficient banks- 14 End FY 2003- No. of efficient banks- 11End FY 2004- No. of efficient banks- 10 End FY 2005- No. of efficient banks- 10

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Empirical Results….

Above grouping results clearly indicate that the number of banks that could feature themselves as efficient banks has decreased over the period under observation.

These results also confirm the trend observed across the country where Reserve Bank of India (RBI) has instructed to terminate the operations of considerable number of UCBs due to lack of performance in order to save the interest of depositors.

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Empirical Results….

Further we attempted to identify the relationship between pure technical efficiency and size of UCBs

We found that a slight proportionate trend between total asset and pure technical efficiency seems to prevail but regressing the result with total asset we observed that all the regression coefficients for all the years are positive but statistically insignificant .

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Empirical Results….

This shows that pure technical efficiency is not governed by size of the bank.

It can be concluded that consolidation of UCBs may be non disruptive exit for weak banks but may not improve the pure technical efficiency of UCBs .

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Empirical Results….

We observed that good corporate governance is critical to efficient functioning of an entity and more so for a banking entity.

In the case of UCBs it has been observed that a combination of politics and bureaucracy has has resulted in poor corporate governance.

UCBs in India are subject to dual control which further affects the quality of supervision and regulations.

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Conclusion

Development of UCBs into safe and vibrant entities requires them to be efficient.

The current market trend and policy makers’ suggest that for better survival for banks, size is one of the important factors.

Our findings confirm that a combination of financial restructuring and institutional reform can only help urban cooperative banks to improve the efficiency.

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Looking at this large gathering of academics, and other professionals, I am sure my address would have created your interest and involvement on the subject. I welcome your views on our approach towards strengthening this important sector of Indian banking.

Thank You.