Credit co-operatives are too big to work

SHGs are a better bet than credit co-operatives.

It has become commonplace to hail institutions with a hoary past, irrespective of their fundamental weaknesses. However, such superfluous praise can do more harm than good to the cause of the institution and its stakeholders.

A case in point was when a top functionary of the RBI recently glorified the rural credit co-operatives for following the tenets and principles of co-operation. However, it is the failure to adopt the principles and tenets of co-operation that is the bane of credit co-operatives in India.

The cooperative should be an effort driven by members and there should be joint liability to avoid free rider problems. Members have been unable to enforce credit discipline because of the extremely large size of these institutions. This, in fact, goes to explain the success of the self-help group model.

Credit co-operatives were, in fact, originally conceptualised as a small group where, more than material means, the moral pressure which the members exert on each other plays a key role in their success. Peer pressure ensures recovery and recycling of funds. It is, however, diluted as membership size grows.

The Mac Lagan Committee, in 1914, had suggested that optimal group size be limited to 40 members to ensure cohesion and peer pressure. This basic principle of cooperation was, however, turned upside down in the post- Independence era in India. The average membership size of primary agriculture credit societies is around 1400.


In post-independent India, rural credit co-operatives evolved more as state sponsored initiatives than member-driven ones. The implementation of the recommendations of the All India Rural Credit Survey (AIRCS) Committee, which submitted its report in 1954, shaped the future of cooperatives in India. The Committee recommended state partnership at all levels of co-operatives, in the form of share capital contribution, provision of technical, managerial and financial assistance to co-operatives. Cooperatives came to be perceived as a state agency, rather than an autonomous, member-based economic enterprise.

The Mirdha Committee, while assessing the growth of the co-operative movement in 1965, had observed that the government policy of deliberate expansion of cooperatives had led to their politicisation and the entrenchment of vested interests. The Committee observed that cooperatives had drifted far away from their original objectives. Based on the observations of the Mirdha Committee, the Conference of State Ministers of Co-operation, in 1969, recommended stringent provisions in cooperative legislation like to curb vested interests.

The restrictive provisions, in effect, legalised government interference, which reached its nadir in 1977 when democratically elected management committees of cooperatives were superseded in nine States with a change in government at the Centre.


The 1990s witnessed attempts to unshackle the cooperative sector from the strictures of the government and restore their democratic character. First, was the attempt by an Expert Committee under the Planning Commission of India which submitted a Model Cooperative Bill. Progress in implementing the Model Law was tardy because of the States' reluctance to shed their control. Subsequent committees on cooperatives, notably those headed by Jagdish Capoor (1999), Vikhe Patil (2001) and V.S. Vyas (2002) strongly supported replacing existing laws with the proposed Model Law.

The latest attempt in the bid to refurbish the credit cooperative system, was the Vaidyanathan Committee in 2005. The Vaidyanathan Committee in line with its mandate suggested an Implementable Action Plan with substantial financial assistance for recapitalisation. Recapitalisation assistance, however, was made conditional to the introduction of strict legal and institutional reforms, capacity building, establishment of a common accounting system and computerisation. In order to avail assistance under the revival package, the State government concerned was required to enter into a memorandum of understanding (MoU) with the NABARD and the central government. Till date 25 States have entered into MoUs. However, there has been a certain amount of dilution in the stipulations set by the Vaidyanathan Committee in the MOUs. For instance, the Committee had recommended the retirement of government equity over time, but subsequently it has been decided to retain 25 per cent of government equity in cooperatives. More importantly, the eligibility conditions to avail financial assistance under the revival package have also been diluted.

It has been more than six years and the recommendations of the Committee are yet to be fully implemented. Further, during the implementation of the revival package, agricultural debt waiver scheme of the Government announced in 2008 has created serious moral hazard problems. With dilution of the original recommendations, tardy implementation and debt waiver scheme of the government, it is no surprise 43 per cent of the 94,647 village level Primary Agricultural Credit Societies (PACS) in the country were loss-making as on March 2011 and that overdues of cooperatives in 2010 were much higher at 41 per cent of loans given, compared with 34 per cent in 2005.

However, the Vaidyanathan Committee has not addressed the issue of ideal member size of co-operatives. Without according due respect to the basic principles governing them, it is unrealistic to expect anything better from the credit co-operatives.

(The author teaches Economics at the Xavier Institute of Management, Bhubaneswar. The views are personal.)

Published on January 10, 2012
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