Banking on rural cooperatives

Calgary Cooperatives Association runs retail stores akin to Wal-Mart; a large petrol and gas station and a finance and leasing outfit of the size of Reliance.

Credit Unions of Canadian Cooperative Association are as good as big as any other commercial bank of Canada and compete effectively in the financial sector. Members who join at nominal membership cost get shares at the end of the year on the basis of their transactions with the cooperative society. This provides members incentive and also enable efficient member participation.

Although Indian cooperatives have a brand image in milk (Amul), fertilisers (KRIBCO & IFFCO), and fruits in some areas, rural credit cooperatives that mostly serve the small and marginal farmers and artisans and small enterprises carry an image of mistrust due to excessive political interference, misgovernance and mismanagement. The efforts to rectify these through legal reform in the shape of 97th Constitution Amendment Act, 2011, has been struck down by the Gujarat High Court, except for upholding the amendment to Article 19, Section 4 (C).

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Various committees on cooperatives have untiringly repeated ‘Cooperatives have failed but must succeed.’ Now, the NABARD after its supervision for the last three decades is tired of listening to this and wanted to clothe the bony PACS with business correspondent (BC) robes! Luckily, the clarifications on the misunderstood circular dated July 22, 2013, came sooner than later.

The purport of the clarification is that the technologically enabled PACS with sound financials can choose to become BCs by separating their core and non-core businesses and give better value to their members, in line with the recommendations of the RBI Expert Committee.

PACS as BCs can set up ATMs and also accept deposits for their principals that would have the guarantee of the Deposit Insurance and Credit Guarantee Corporation (DICGCI), as the principals are RBI licensed banks. This would help speeding up financial inclusion in the villages, as commercial banks and existing BCs are finding it difficult to reach out to remote villages.

The role of BCs as mentioned in the 2012-13 first quarter monetary policy (para 72) RBI briefly reads thus: “While all the efforts made for financial inclusion have expanded the access to banking services, it is also important that quality services are provided through newly set up ICT-based BC delivery model. It is, therefore, necessary to have an intermediate brick and mortar structure between the present base branch and BC locations so as to provide support to about 8-10 BC units at a reasonable distance of 3-4 km. .” The BC model allows banks to do cash-in-cash-out transactions at a location much closer to the rural population, thus addressing the last mile problem.

PACS’ usefulness

As on March 31, 2013, banks have reported deploying 195,380 business correspondents that covered 221,341 villages, according to the latest available RBI data. Data relating to credit extended and deposits secured by these BCs is not yet clear. If we were to go by the concerns of the regulator expressed in the recent past, the gap in expectations is still large and therefore, there is need for alternative models of BCs to come into being.

The Deputy Governor RBI, K. C. Chakrabarty says: “Banks must not approach financial inclusion as charity but as viable business model.” This now applies equally to District Central Cooperative Banks (DCCBs) and State Cooperative Banks (SCBs).

Low volumes of transactions would not make the BCs viable. Most PACS have only low volumes because their agricultural lending is in a large measure only to the small and marginal farmers.

An RBI committee has clearly mentioned that but for the PACS’ role in farm credit, this clientele would have been starved of institutional credit.

This leaves us with the logical conclusion that the PACS would end up as losing entities even as BCs; more so, because the their principals would not be in a position to pay more commission than their commercial bank counterparts.

While the DCCBs could be in core banking solutions, the manually operated PACS with inefficient accounting practices would not serve as BCs capable of delivering financial inclusion results.

There must be a firm resolve on the part of all the existing PACS that they should mop up share capital to cover additional business risks other than credit risks. Active members should be legally defined in the State cooperative laws; these alone should have say in the governance and management of affairs of PACS.

(The author is former Member of an RBI expert committee and an economist.)

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