The Hindu Business Line : Vaidyanathan panel report on co-op credit

THE Indian establishment is addicted to Committees. "Show me a problem and I will set up a Committee" is its standard response. There has been a flurry of committees on agricultural credit, especially in recent years.

The latest group to submit its report on agricultural credit is the Task Force on Co-operative Credit System headed by Dr A. Vaidyanathan. It has come out with detailed recommendations for recapitalising the credit system, subject to actions by the co-operative credit system and the Government itself formulating a new Co-operative Act. Importantly, it demands that Governments foreswear intervention in the functioning of co-operative societies.

The cost for the total rehabilitation is estimated at roughly Rs 10,000 crore, which is relatively small compared to the magnitude of the task and the large number of co-operative institutions — a lakh — under revitalisation.

The Task Force must be complimented for attempting a clear, detailed and definitive package of rehabilitation for the co-operative credit system.

One hopes that its recommendations are accepted and fully implemented. It is understood that the State Governments have generally accepted the recommendations.

The Vaidyanathan Task Force has laid particular emphasis on eliminating State interference in the functioning of the co-operative system. With this end in view, it goes to the extent of making arrangements for retiring the share capital contributed to co-operative societies by State Governments.

This contribution had been made in pursuance of the Rural Credit Review Committee's recommendations in the 1950s.

While the participation by the State in the share capital of co-operatives was intended to strengthen the viability of the system, the Task Force feels that it has had the incidental and unintended (?) consequence of legitimising the interference of State Governments, mainly through representatives on the Boards of the co-operative institutions and detailed guidance and supervision.

The Task Force recognises that the co-operatives may not all be in a position to "fund" such returns of capital.

As part of the recapitalisation package, State Governments will be assisted to make a soft loan to the co-operatives in order to repay the share capital.

While I appreciate the motivation of the Task Force in ensuring a clean break with the past and helping co-operatives to repay the share capital, I feel that the same purpose could have been achieved by the State Governments themselves not exercising the right to have nominees on the boards of co-operative institutions.

The complications of retirement of capital and of consequential disbursement of an equivalent amount as soft loan by the States could have been avoided. After all, not every shareholder needs to insist on the right to have a nominee on the Board.

Exhortations, including those made by Pandit Jawaharlal Nehru himself in the 1950s asking for depoliticisation of co-operatives, have not worked.

Political governments will not easily stay away from putting their hands into the honey-pot of co-operatives, just because they have no equity.

This apart, the report of the Task Force reviews the overall performance of the co-operative credit system keeping in view the reports of earlier Committees.

It is, however, significant to note that it has not reviewed the report of the Khusro Committee of the 1980s, which had made many seminal recommendations on the credit system. Many of these recommendations still lie unimplemented.

The Task Force focusses particularly on impairment in governance and poor financial performance of the co-operative credit system. The share of the co-operative credit system in the disbursement of rural credit has gone down from 65 per cent in 1990 to 35 per cent or less in the latest period.

This decline may, however, be a reflection of the increased disbursals by the commercial banks consequent on Government's increased emphasis on their agricultural lending by banks themselves. The average loan size of the co-operative credit system is significantly lower than that of the commercial banks.

The commercial banks are more oriented towards handling the richer sections of the farmers, while co-operatives cater to the less-privileged groups.

The Task Force has suggested the enactment of a new model Co-operative Societies Bill. Hopefully, this will meet the desired objective of reducing State intervention. The Task Force recommends that the RBI be given clear authority in respect of regulation. One recommendation emerging from the proposed Bill is that audit of the Primary Agricultural Co-operative Credit Societies be given to professional chartered accountants.

While this may be music to the ears of chartered accountants, I do not see how it will be a great improvement on audit by suitably trained staff of the Registrar of Co-operative Societies (RCS).

While I see merit in CAs being required to audit district-level and State-level co-operative institutions, I do not see the logic in imposing CAs on PACs.

The auditors on the RCS staff are perhaps more attuned to handling the problems of widely dispersed rural credit societies, while CAs are generally better-equipped to handle urban-based corporate accounts.

True, the audit is at present pending in a number of societies. This has to be rectified by either adding staff or outsourcing a part of the work. The suggestion to employ CAs for audit of PACs is definitely bound to have cost implications — CAs may also find themselves at sea in the wilderness of PACs.

While the Task Force rightly emphasises the overall problem of governance in Primary Agricultural Co-operatives, in its overemphasis on the need to remove government interference, it ignores the ground reality of other factors.

To say, as the Task Force does, that primary agricultural co-operatives will have to have Boards, which are manned by "fit and proper" persons, is to wish away the reality that most of these members will be drawn from villagers themselves.

They will most probably not have the professional qualifications which RBI may prescribe. Hopefully, there will be some relaxation of the "fit and proper" criteria when it comes to the question of rural PACs.

More important than the Board of PACs is the question of staff at the PAC level. As the Khusro Committee had rightly pointed out in its report, the critical weakness of PACs is most evident in the poor quality of their secretariats. The fact remains that it is difficult for PACs with their poor finance to attract quality staff. The pay scales they offer are not attractive.

Second, promotion prospects in PACs are limited. In this context, the prejudice against the State-sponsored cadre may not be fully justified. A State-sponsored cadre has the advantage that such an arrangement can attract better staff as it offers better prospects of promotion and training.

While the managements of PACs may not command the full loyalty of such staff, one has to arrive at a balance here between the demands of the PACs' autonomy in recruitment and the difficulty of getting qualified staff on a piecemeal basis to serve at village level societies.

A more material problem is one relating to recoveries of debt. The high level of under-recoveries of PACs is, indeed, depressing. The Table shows this has impacted not only the financial results of the State Co-operative Banks and District Central Co-operative Banks but also Primary Agricultural Co-operative Societies.

While this may be due in part to seasonal factors, such as failure of monsoons, it cannot also be denied that periodic waivers of loans by State Governments have created a culture of default.

In this context, I have a suggestion to make that may be worthwhile for reformers of co-operative credit system. There is need to consider whether a model such as the Amul Co-operative System, which marries marketing with distribution of credit, should not be tried in the sphere of general agricultural credit.

If the same co-operative societies were to handle marketing as well as credit, they can appropriate sale proceeds of crops against loan dues. There are successful models of such integrated co-operatives functioning in the case of sugarcane co-operatives, where recoveries are made against dues from price of sugarcane paid by the sugar factory.

Summing up, the report of the Vaidyanathan Task Force requires to be implemented in the right spirit. There can be differences in points of emphasis, but the Task Force deserves compliments for its detailed proposals to bring the system back to health. Its recommendations are, by and large, salutary and need to be translated into effective implementation as soon as possible.

Let it not be left to yet another Committee on agricultural credit to say that the report of this Task Force has also been mothballed together with those of its distinguished predecessors — like the Khusro Committee, the Kapoor Committee and the Vyas Committee.

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