The Hindu Business Line : Gaining confidence of investors again

Despite their inherent weaknesses, cooperative banks still play a major role in their role as credit institutions in rural areas. The relevance of cooperative banks cannot be questioned even after innumerable scams and meltdowns that have eroded the savings of millions of investors over the last few years.

COOPERATIVE banking movement in India could trace its roots to the passage of Cooperative Credit Societies Act in 1904 and to Cooperative Societies Act in 1912.

Thus, it was the British Raj that recognised the dependence of Indian farmers on unscrupulous moneylenders as a major cause for their perpetual poverty. Once the first set of Government policies were put in place, the provincial governments took up the initiative with such enthusiasm that `cooperation' became a provincial subject in 1919.

In a report in 1928, the Royal Commission of Agriculture in India said that the cooperative movement should continue to focus on expanding rural credit, with the state required to patronise the cooperatives and protect the sector.

Rural credit

Then came a phase between 1930 and 1950 when the Reserve Bank of India began playing a crucial role. The Reserve Bank of India Act, 1934 provided for the setting up of an `agricultural credit department' and for extending refinance facilities to the cooperative credit system.

The thrust was on setting up, strengthening and promoting financially viable provincial cooperative banks, central cooperative banks, marketing societies and primary agricultural credit societies.

However, the Government policy during this period was not as helpful to sector as before and by the time an initiative was taken in 1945 by way of setting up the Agricultural Finance Committee and the Cooperative Planning Committee, an element of sickness had crept into the Indian rural cooperative movement.

By then, a number of cooperatives came under the cloud of unrecoverable loans; it was decided that the frozen assets of the members of these cooperatives be liquidated. This, in a way, marked the beginning of state intervention in the management of cooperative credit institutions. The Cooperative Planning Committee identified the primary cause of failure to be the relatively small size of the primary cooperatives.

Post Independence phase

Post Independence, cooperatives, especially those in the rural financial stream, gained prominent attention. The All India Rural Credit Survey recommended state partnership in equity, governance and management of cooperatives.

The premise was that the Government should make available adequate supply of cheap institutional credit to rural areas through cooperatives. The state gave primacy to cooperatives as the sole means of delivering institutional credit to rural areas and began pumping in large amounts of money directly through the system.

Upper tier cooperative banks were encouraged to receive public deposits and borrow from other financial institutions. With financial involvement came political interference in the running of these cooperatives, leading to compromise on aspects such as credit worthiness, leading to a steady decline in their financial health. Instead of tackling the root cause, the Government kept on infusing additional capital.

During the last 15 years, there has been increasing realisation of the negative impact of such State patronage involving politicisation of these institutions. Recommendations by several committees on reforming the cooperative sector have been ineffective mainly as the respective States have not only been unwilling to share the cost of such revamp, but in giving up their powers to the RBI.

Revamping Cooperatives

The Government of India reiterated its commitment to `reviving and revitalising' the rural cooperative credit structure by setting up a task force as per a notification in August 2004. The idea was to formulate a practical plan of action to rejuvenate the rural cooperative credit structure.

The task force, that was asked to suggest an appropriate regulatory framework and the amendments that were required in the existing laws, was also called upon to make an assessment of the financial assistance that the cooperative banking institutions required for their revival.

The recommendations of the task force, chaired by Prof A. Vaidyanathan, is expected to be the backbone of the way in which rural cooperative credit institutions will function in India in the days to come.

Recently, Ms Usha Thorat, Deputy Governor of RBI, had said that the central bank would initiate steps to strengthen the cooperative credit system run by the state governments as per the recommendations of the Vaidyanathan panel report. Though the restructuring process has started, complete implementation of the task force recommendations would take time, she said.

Urban Cooperative Banks

Just as important as the rural cooperative credit institutions are the urban cooperative banks (UCBs), which play an integral role in the overall financial system of the country. Underlining their growing significance, the last 15 years have witnessed phenomenal growth in this sector - both in terms of reach and in funds handled.

The UCBs in India have grown from 1,307 in 1991 to 2,105 in 2004 just as the deposit base has zoomed from Rs 8,600 crore to over Rs 100,000 crore and advances, from Rs 7,800 crore to over Rs 65,000 crore. The deregulation of interest rates, as in the case of commercial banks have enabled UCBs to mop up massive deposits.

This growth that came in an environment marked by stiff competition, has come out of the efforts made by the UCBs to tap the small investors. The flip side is that there has been some erosion of public confidence on account of a series of scams involving UCBs. This has brought about the need to mitigate the financial risks that UCBs are prone to, even while continuing with the furious pace of growth that the sector has been able to keep up. And a major prerequisite in realising this goal, it is felt, is the doing away of the dual control system between RBI and the State governments.

At present, the UCBs are regulated and supervised by State Registrar of Cooperative Societies, Central Registrar of Cooperative Societies (in case of UCBs with presence in more than one state) and RBI. However, the UCB union has sought reintroduction of the Banking Regulation (Amendments) Miscellaneous Provisions Bills, 2003 to bring a permanent end to the `dual' controlling systems in the UCBs.

Unions favour RBI control

The General Secretary of All India Cooperative Bank Employees' Federation, Mr P. Balakrishnan said only a few days back at the inauguration of a two-day national convention on `Health of Urban Cooperatives' that the State governments had no clue about "how to run an urban bank as a banking institution.

"It is high time cooperative banks were brought under the purview of the Banking Regulation Act, 1949 and properly regulated," he said, adding that a modest infusion of capital could revive almost all urban cooperative banks from their sickness and become viable if these banks operate strictly under RBI.

Way forward

The strategy to deal with UCBs may have to be State specific, involving the particular state government, UCBs and the RBI. A State-level task force on UCBs, with the Regional Director of RBI, Registrar of Cooperative Societies as the Chairman and C-Chairman, could identify weak but viable UCBs and frame time-bound revival programme. Thus, the onus would be on this task force to gauge the funds to be infused, changes in management to be effected and also set up milestones to be achieved in the turnaround path. It would fall upon RBI to monitor such progress and initiate action in case of failure to achieve such milestones.

On the flip side, those UCBs found unviable by this task force will have to take the exit route. The exit route could be either through merger with strong banks or through voluntary conversion into cooperative societies and in such cases where there is no other option, these UCBs will need to get taken into liquidation by the Registrar of Cooperatives on the advice of RBI.

As the RBI is not empowered to take direct action against UCBs, the prerequisite may be a MoU between the respective State Government and RBI, to by-pass the hurdles posed by the existing dual control regime. Also, there may the need to have a differentiated regulatory regime, given the high degree of variation within this sector on aspects such as deposit/asset base.

Every single player involved will have to do its bit to ensure the UCBs continue to thrive and the depositor/public interest is protected. The State and Central Governments need to recognise the UCBs more as banking institutions rather than mere cooperative societies.

And it is here RBI can play its role in ensuring that these cooperative banks function to the satisfaction of its depositors and public at large.

More Stories on : Co-operatives | Rural Development | Maharashtra

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