Revitalising primary agricultural cooperative societies

Historically, credit cooperatives have occupied a pre-eminent position in the provision of agriculture credit and primary agricultural cooperative societies (PACS) have been the building blocks of rural cooperative banking in India, for over a hundred years.

With the dwindling share of cooperatives in rural credit, the relevance of these institutions has been periodically questioned in policy circles in the backdrop of a fast-changing financial system where efficiency, profitability, technology and sustainability are emphasised. The refrain of some policy advocacy groups has been that only strong organisations that can deliver sustainable outcomes should be allowed to continue in the financial space.

Many committees have pointed out various issues plaguing the cooperative system such as; lack of active participation by the members, lack of professionalism, absence of corporate governance, politicisation, bureaucratisation, ageing and unenthusiastic employees. However, cooperatives are unique as democratic member-controlled entities, with members as owners and customers of the institution.

Credit cooperatives had a dominant role in purveying agricultural credit, with a share of more than 60 per cent in the fifties which, over time, declined sharply to 14 per cent due to increasing share of commercial banks (74 per cent) and Regional Rural Banks (12 per cent).

With smaller share of 11 per cent of total agricultural credit, cooperatives are covering 19 per cent of farmers (2.60 crore accounts), reflecting better coverage of small and marginal farmers. The share of small and marginal farmers in total loan amount disbursed by cooperatives is 69.7 per cent as against 47.3 per cent in respect of commercial banks as on March 31, 2020. What is more significant is, the number of members from marginal farmers category supported by cooperatives has gone up from 5.52 crore to 6.73 crore and borrowers from 2.20 crore to 2.28 crore in 2019 as compared to 2018.

With a total of 95,300, PACS have a huge membership of 132 million members, from more than six lakh villages. Today, India’s cooperative credit structure, with over 130 million members (including sixty million borrowers), constitutes one of the largest rural financial systems in the world.

Why cooperative societies are languishing

But the cooperative system has mostly not realised the enormous potential of its vast outreach, mainly because of financial weaknesses and impaired governance standards. The concept of mutuality (with savings and credit functions going together), that provided strength to cooperatives the world over, was not established strongly in India, with higher greater focus being given to borrowing and lending. This lending-centric approach, coupled with poor governance systems, led to dependence on higher financing agencies for resources, recurrent losses, deposit erosion, poor portfolio quality, etc.

While it is true that many of the primary societies are fraught with a range of organisational and managerial issues, especially on the governance front, it is also worth noting that 46,930 of them are profit-making as of March 31, 2019, with combined profit of ₹5,949 crore as per NAFSCOB data.

Concentration risk

Rural Credit Cooperatives covering 87 per cent of the villages in the country continue to remain the only institutions at the village level that understand the rural ethos. They have the potential to provide services that no other financial institution can provide due to their vast grass root outreach. Much before the terms ‘Financial Inclusion’ and ‘Farmer Producer Organisations’ came into popular lexicon, PACS have been performing these functions as peoples’ collectives, serving vulnerable sections of the rural population such as scheduled caste, scheduled tribe, small and marginal farmers, much before they were on the radar of the commercial banks.

Traditionally, PACS have only been in the business of credit dispensation, though having the capability and enabling provisions to take up multiple activities covering credit, input and output marketing, custom hiring of agri equipment, processing, retail services, etc., thus meeting entire requirements of farm households.

Exit co-ops, enter farmer producer cooperatives

PACS have a business model that can provide end-to-end solutions, but due to various weaknesses, have not fully realised their business potential leveraging their strengths and networks. The limited business activity of providing only short-term agriculture credit has resulted in concentration risk in the business portfolio of PACS, in addition to extreme vulnerabilities of weather and market risks, as also the ever-present overhang of political risk.

Their relevance vis-a-vis new age FPOs

While credit is an essential input in the agriculture production process for small farmers, other services like farm advisory, quality input supply, provision of farm machinery, processing, output marketing, technology support, etc, are equally, if not more critical. It is the combination and timely availability of credit and non-credit services that make investment in agriculture productive. This is where the unique position of cooperatives, which can provide a combination of credit and non-credit inputs essential for agriculture on a single platform, and function as a one-stop shop for total requirements of farmers, assumes significance.

While commercial and regional rural banks, through their branches, can provide credit, the new generation FPOs are focussing on non-credit service like input supply, processing, output marketing, etc. Ideally, it is only a PACS that can provide all types of services under one roof, contributing to enhanced production levels and marketing opportunities. In the last eight years, around 6,500 FPOs have been promoted under various schemes with limited success, and there is no reason why PACS having immense potential cannot be strengthened to function as efficient farmer collectives by infusing required resources, financial and organisational, with better governance systems.

The business potential of PACS

The business levels of well-diversified societies in some of States are in the range of ₹100 to ₹125 crore, as compared to business levels of ₹30 to ₹40 crore of a commercial bank branch operating in the same area. This has been possible because Societies offer credit and non-credit services, with non-credit operations contributing significantly to overall business and profitability.

Experience shows that wherever credit cooperatives have been able to provide both credit and non-credit services effectively, such cooperatives have had not just sustainable growth, but have more active members utilising the services of the society, and have been able to garner higher market share compared to their peers. Such societies have even been able to provide extension services, welfare services, community services, in addition to credit related services. Non-credit business offers higher margin and contributes significantly to the profitability of the societies and enabled sustained growth even in a fast-changing operating environment.

On the other hand, cooperatives that confined themselves to credit operations have found operations less profitable, to a major extent due to lower margins in credit business, coupled with factors like poor recovery performance. Thus, the future of PACS depends on their capacity to provide a suite of services covering the forward and backward linkages combining what a bank and FPO can offer to their members.

Multi Service Centre: A promising opportunity

One of the best ways PACS could become prominent players in rural financial services could be by transforming into Multi Service Centres (MSCs) providing a diversified suite of products and services for local community. This will de-risk the business operations of PACSs as is evident from experiences of successful societies, one of the best examples being the Mulkanoor Co-operative Rural Bank and Marketing Society Limited (MCRBMSL) in Telangana State. Set up primarily to accept deposits from and extend loans to its members for agriculture and allied activities, the society has, over the years, expanded activities to undertake trading in pesticides, seeds and fertilisers; custom hiring of agri equipment, value addition activities such as rice milling, seed production, processing infrastructure, and marketing support, as also consumer stores and a range of welfare measures, thus sustaining its growth.

AIF: Tremendous possibilities

The Agriculture Infrastructure Fund recently established by the Government of India with a corpus of ₹1 lakh crore for financing agriculture Infrastructure Projects at farm-gate & aggregation points (Primary Agricultural Cooperative Societies, Farmer Producer Organisations, agriculture entrepreneurs, start-ups, etc.) holds tremendous possibilities for PACS to transform as Multi Service Centres (MSCs) and emerge as one-stop shop for meeting various requirements of rural households.

With credit guarantee up to ₹2.00 crore and interest subvention of 3 per cent, along with convergence of various State and Central government schemes, AIF offers huge potential to convert PACS into MSCs. This provision of multiple services through creation of various need-based infrastructure facilities could increase business potential and operational efficiency, and enable the society to provide required services to members.

Given the criticality of non-credit business for ensuring sustainability of cooperative societies, it is desirable that each State convert at least half of the societies as MSCs. As per NAFSCOB data, of the total 95,995 societies, 46,930 societies are in profit as on March 31, 2019, and 17,904 societies are potentially viable. Of the total societies, 53,601 PACSs only have own godowns, an essential requirement for storage of produce. Though NABARD has very appropriately envisaged transformation of 35,000 PACSs as MSCs over the next three years, the utilisation of the support needs to improve as only 3,055 societies are understood to have been given in-principle approval.

To take the process forward, the concerned agencies need to take up identification of suitable PACSs in each district based on the potential available and chalk out an action plan to convert them into MSCs in a defined time frame. This process should simultaneously involve capacity-building of human resources, technology adoption and adoption of better governance standards.

The time is right to take up such an endeavour and transform the working of rural credit cooperatives by bringing about professionalism and good governance practices and making them modern, vibrant and relevant institutions for today’s times. These institutions, which are more than a hundred years old, deserve another policy push, and can occupy a prominent space in the vision of Atmanirbhar Bharat as also Vocal for Local of the Government of India as they have the potential to be the building blocks of an Atmanirbhar village economy.

Emmanuel Murray is senior advisor, Caspian Impact Investment, and Suresh Kumar is a former chief general manager, NABARD

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