Banking on cooperatives is better business

The need for cooperatives in wealth creation arises mainly because a cooperative can create more value or surplus than the individual. However, the organisation and management of cooperatives is complex. It is more complex in the case of a rural cooperative credit structure as: (1) this structure is part of the overall financial structure and has a contributory responsibility to the financial stability; (2) it has to abide by the regulatory policy and procedures; and (3) its capital structure demands continuing infusion of capital under Basel III.

Well-governed cooperatives that are tech-savvy and professionally managed have the capacity to cross-hold risks because of their ability to take on both banking and non-banking activities. But several initiatives have not succeeded because of political interference and unsupervised reform agenda. Therefore, a fresh look at these potential development institutions is imminent.

The Centre, following the recommendations of the Vaidyanathan Committee, undertook reforms in rural credit cooperatives with the announcement of a grant assistance of ₹15,000 crore although only ₹9003 crore has been released to the States that agreed to abide by the conditions attendant on such assistance. The States that entered into an MoU with Nabard and the Centre were to bring about amendments to their Cooperative Acts; conduct elections to the PACS and ensure their democratic governance; computerise all PACS within set timelines; introduce healthy accounting and audit practices; and ensure that the entire rural cooperative credit structure gets into financial discipline on par with the commercial banks.

Nabard compromised on all the conditions and released grant assistance to various States at different points of time from 2005 to 2011. All the States have breached the conditions. Owing to its business interests with the States due to Rural Infrastructure Development Fund releases, Nabard will not be able to recall the mis-spent grant assistance. Therefore, the Centre should take the lead and re-engineer the processes of reforms.

Currently, the cooperative legislation is biased towards rural cooperative credit structure. Different treatments are warranted for thrift and credit societies, housing cooperatives, consumer cooperatives, dairy, fisheries and commodity cooperatives, weavers’ cooperatives, and labour cooperatives distinct from the Agricultural Cooperative Credit Societies. States have to recognise this and change their Acts appropriately.

The 97th Amendment to the Constitution notified on January 13, 2012, and the attendant amendments to section 43B of Part IV and 243ZQ demand changes in governance rules of the credit and other cooperatives of various States by taking up suitable amendments to the existing legislation. While the right to form a cooperative has been recognised, the other provisions of the Act were struck down by the Gujarat High Court. The main objection stems from the lack of consultation with the States on the law.

Cooperative advocacy and member education are key to ushering in reforms in cooperatives. The recent efforts of Nabard with consultation from GIZ through the Centre for Cooperative Excellence hold promise.

In its present form, Nabard will not be able to meet the goals of cooperative reforms. It should have a dedicated associate to deal with rural cooperative credit structure. Cooperative advocacy and member education are the cornerstones of success of any future efforts of revamping cooperatives. Transparency and accountability demand heavy investments in technology that the cooperatives can currently ill-afford and therefore, the Centre would do well to institute a dedicated fund for the purpose.

A cooperative grants commission should be set up to encourage promotional activities such as member education, advocacy, technology infusion and governance.

States should set up cooperative development boards to oversee the reforms and ensure networking of all the cooperative institutions to ensure that there is no overlapping of efforts and wastage of resources.

The cooperatives enjoy a vast network and penetration in the rural areas. Hence they would prove to be the best bet for financial inclusion. Jan Dhan could penetrate deeper and faster through cooperatives than through commercial banks and at much lower costs. The benefits of cooperative reforms would outstrip costs. It is action that is required on a host of well-spun recommendations of the committees headed by Vaidyanathan and SG Patil. The time is ripe for action.

The writer is an economist and a former member of the RBI Expert Committee on Short Term Cooperative Credit Restructuring

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