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Conceptual Errors

It was interesting to read the article ‘Rural Short-term Cooperative Credit Structure’ by Mandira Sharma and Rajiv Kumar (March 1, 2008), but unfortunately for all the wrong reasons. The authors would have done well to first understand some basic concepts like capital, non-performing assets, majority shareholding, etc, before commenting at such length on the Vaidyanathan Committee recommendations and implementation of the government of India’s revival package based on it.

The authors have made the first big mistake of treating borrowings of primary agricultural cooperative societies or PACS (for onward lending) as their tier II capital. While such borrowings add to the working funds of a cooperative to help it lend larger volumes to its members, they have nothing to do with its capital structure. The authors would have found it useful to go through the Master Circular of RBI on Prudential Norms on Capital Adequacy for an understanding of capital and its bifurcation into tier I and tier II components. (For the general reader we would like to mention that tier I capital includes paid-up capital, statutory reserves, other disclosed free reserves and any capital reserves representing surplus arising out of sale proceeds of assets. Elements of tier II capital include undisclosed reserves, revaluation reserves, general provisions and loss reserves, provisions for standard assets, hybrid debt capital instruments, and subordinated debt, etc.)

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