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Saurashtra University Re – Accredited Grade ‘B’ by NAAC (CGPA 2.93) Vadhar, Bipinchandra T., 2011, A Study on Governance Practices in Co- operative Banks, thesis PhD, Saurashtra University http://etheses.saurashtrauniversity.edu/id/eprint/72 Copyright and moral rights for this thesis are retained by the author A copy can be downloaded for personal non-commercial research or study, without prior permission or charge. This thesis cannot be reproduced or quoted extensively from without first obtaining permission in writing from the Author. The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the Author When referring to this work, full bibliographic details including the author, title, awarding institution and date of the thesis must be given. Saurashtra University Theses Service http://etheses.saurashtrauniversity.edu [email protected] © The Author A STUDY ON GOVERNANCE PRACTICES IN CO-OPERATIVE BANKS A THESIS SUBMITTED TO SAURASHTRA UNIVERSITY FOR THE AWARD OF DEGREE OF Ph. D. IN MANAGEMENT SUBMITTED BY BIPINCHANDRA T. VADHAR MANAGEMENT CONSULTANT JAMNAGAR – 361 001 UNDER THE GUIDANCE OF DR. HARISH M. SHAH PRINCIPAL K.K. PAREKH COLLEGE OF COMMERCE & B.B.A. AMRELI – 365 601 MARCH – 2011 DECLARATION I Bipinchandra T. Vadhar, declare that the conceptual frame work of this thesis has been developed by me on the detail and in-depth review of literature available as shown in Bibliographical references. Also it is based on personal experience working with a leading cooperative Bank in the position of Chairman, Managing Director etc. I have prepared several statistical data notes, opinions and other information published in various, books, Journals periodicals and numerous circulars of The Reserve Bank of India. All such sources are identified and clearly mentioned. The interpretation of all such data is of my own and of original creation. Moreover I also declare that for the work done in this thesis in entitled “Study on Governance Practices Cooperative Banks” involve lots of original research carriedout by me under the able guidance and supervision of Dr. Pratapsinh L. Chauhan, Dean, Professor and Head of the Department of Business Management (MBA Program) Saurashtra University, Rajkot. This work has not been submitted earlier for the award of any diploma, degree, or other similar title. Place : JAMNAGAR Date : 25/03/2011 Bipinchandra T. Vadhar II CERTIFICATE This is to certify that the thesis titled “A STUDY ON GOVERNANCE PRACTICES IN CO-OPERATIVE BANKS” submitted by Mr. Bipinchandra T. Vadhar for the award of Degree of Doctor of Philosophy in Management under the faculty of Management is based on research work carryout by him under my guidance and supervision. To the best of my knowledge and behalf it has not been submitted for any other degree or diploma and the thesis represents independent work on the part of the candidate. Dr. Harish M. Shah Research Supervisor Date : III ACKNOWLEDGEMENT For such massive study many professionals helped me in variety of ways. It would be quite appropriate to remember them and express my heartfelt gratitude, to all those who has encouraged me and supported me. First and foremost among all these well wishers, Dr. Pratapsinh L. Chauhan who has been perusing me to carryout Research works, at least since last 5 years. Though initially I was reluctant for variety of reasons, but finally wishes of Dr. Pratapsinh Chauhan prevailed. I am so happy that I was able to spare repaired of time (about 3 years) and to-day the work is ready. I owe a deep and gratitude and heartfelt thanks to Dr. Pratapsinh L. Chauhan the Dean Professor and Head of the Department of Business Management (MBA) program Saurashtra University, Rajkot. Not only Dr. Chauhan continuously encouraged me but he made it sure I complete the Research work “ON TIME”. I am also so much thankful to Dr. H.M. Shah – Principal, K.K. Parekh College of Commerce and B.B.A. – AMRELI. Right from the inception he continuously encouraged me and made himself available whenever I solicited his help and guidance I owe him also my deep gratitude and thanks for all his help. X I am also thankful to Dr. Sanjay Bhayani, Associate Professor, Department of Business Management – Saurashtra University, Rajkot for not only inspiring but also providing time and again valuable guidance support, suggestions and took plenty of interest to see that this Research work is completed. Further I am so much obliged and greatly indebted to Shri Bhanuprasad Kapadia Ex. Dy. General Manager State Bank of Saurashtra. Shri Kapdia Saheb has accumulated so much, knowledge of Co-operative Banks, its functioning, its inter relationship between District and State Co-operative authorities, State Government and The super body The Reserve Bank of India. Probably he should be rated number one amongst banking professionals as far as the interpretation of RBI circulars and compliance to the same. He helped me immensely to carryout this Research work with plenty of information and practical guidance. My heartfelt Thanks to Shri Bhanuprasad A. Kapadia. Among my friends and well wishers, how can I forget Dr. G.S. Matharu – Senior Professor at M.P. Shah Commerce College – Jamnagar , whose vision of imparting education is unique in every sense. He continuously helped me in my GLOOM Hours. Big Thanks You Dr. Matharu Saheb. XI I can not forget the help and assistance from Dr. Ajay Shah – Principal, of M.B.A. College well known as JVIMS who continuously guided me for this work and without his help this work may not have been completed. I am thankful to Mr. Timir Vasa for all compilation work EDP work and for neatly preparing the entire paperwork. He worked with me most sincerely and efficiently to complete this Task. Last but not the least; I am grateful to my parents who always encouraged all of us for better education and for hard work with honesty and integrity. My family has always stood by me, all these years, my wife Nirupama, Son Parimal his wife Leena and of course my grand Children, from whom I took away their family time to complete this work. Rest of my family members also supported me and they always stand by me to relieve me for the needed time. I am thankful to all of them. In the end I am grateful to ALL and of course the “ALMIGHTY” for the choicest Blessings. Date : Place : Jamnagar Bipinchandra T. Vadahr XII PREFACE Since the 19th century, cooperative banks have been an important feature of the India and European banking landscape. On present trends, this is likely to remain the case at least well into the 21st century, as most cooperative banks seem healthy and many of them are increasing their market shares. Nevertheless, the importance of cooperative banks, the implications of their specific nature, and the dynamics of their interaction with other types of banks have at times escaped fitting attention among policymakers and in the literature. This paper attempts to help remedy this. The paper argues that the success of cooperative banks can be explained by their evolving comparative advantages. Originally devised to overcome problems of asymmetric information in favor of borrowers, their current success appears driven to a significant extent by problems of asymmetric information in favor of banks. As consumer-owned institutions, cooperative banks have a comparative advantage in gaining the trust of their customers. Nevertheless, cooperative banks face fundamental challenges rooted in their institutional set-up. Most cooperatives were designed from the outset to perpetually accumulate capital. This was done by defining members’ ownership rights as applying only to the notional value represented by paid- up membership shares (and any capitalized dividends) and by limiting the disbursement of profits. As a result, the economic value of a cooperative, net of debts and the nominal value of member shares, constitutes an intergenerational endowment without final owners. It is available to current IV members, under the implicit or explicit understanding that they will further grow the endowment and pass it on to the next generation of members. In this interpretation, cooperative bank managers can be seen as custodians of this endowment. The existence of such an owner-less endowment constitutes a major challenge to the governance systems of a cooperative. It reduces members’ incentives to exert effective oversight over management, while at the same time increasing the need for such oversight. In many respects, governance systems may struggle to meet this challenge. These systems were originally designed for small institutions functioning within close communities, but are now being applied with little fundamental change to large, complex, financial conglomerates. Moreover, the functioning of corporate governance mechanisms could be hampered by collective action problems that appear more daunting than in investor-owned companies, the absence or reduced impact of market signals, and in many cases lower disclosure of Information. In cooperative banks, two important risks may materialize when corporate governance systems fail. First, managers may use the intergenerational endowment for purposes other than members’ best interests. In particular, they may use it as a tool for empire-building. Second, there is a risk that inevitable attempts to appropriate (part of) the endowment may succeed. V From a financial stability point of view, the competitive dynamics between cooperative and commercial banks merit special attention. Cooperatives can use their low cost and often abundant capital and the absence of a profit maximization constraint to pursue expansion plans that put competitive pressure on other financial institutions. If, mindful of this risk, prudential authorities insist that cooperatives achieve similar returns on equity as commercial banks, they may end up pushing cooperatives to expand into risky activities that they cannot adequately control.

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