Tuesday, December 30, 2014

Banking on cooperatives is better business

Cooperatives are wealth creators:
The need for cooperatives in wealth creation arises mainly due to the reason that a cooperative can create more value or surplus than the individual can. Conceptually, if a cooperative is well run, it will bring more benefits to its members. The organization and management of a cooperative enterprise, however, is complex. It is more complex in the case of 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.

Professional management and tech-savvy well-governed cooperatives have capacities to cross-hold risks because of their ability to take both banking and non-banking activities. But several initiatives thus far did not succeed because of political interference and unsupervised reform agenda. A fresh look at these potential development institutions is imminent.

Hasten Reforms in Cooperatives:
Government of India, following the recommendations of the Vaidyanathan Committee, undertook reforms in rural credit cooperatives with the announcement of a grant assistance of Rs.15000crores, although only Rs.9003cr 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 GoI as parties were to bring about amendments to their Cooperative Acts; conduct elections to the PACS and ensure their democratic governance; computerize all PACS within set timelines, and 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 should regain lost ground:
NABARD for its own reasons compromised on all the conditions and released grant assistance at different points of time during 2005-11 to various states. All the States have breached the conditions: amendments to state cooperative laws were a farce; computerization was not done as promised and both the respective governments; accounting practices at PACS did not change much; audits were unprofessional and lack of transparency and fraudulent practices still continue. NABARD, because of its business interests with the states due to RIDF releases would not be able to recall the mis-spent Vaidyanathan Grant assistance. GOI should take the lead and re-engineer the processes of reforms.

Legal Reforms Imminent:
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 recognize this and change their Acts appropriately.

97th Amendment to the Constitution notified on Jan 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 henceforward. While the right to form a cooperative has been recognized, the other provisions of the Act were struck down by Gujarat High Court and the main objection stems from the lack of consultation with the States on the Law. When the GOI could successfully negotiate GST with the States, there is no reason for a similar effort to follow in this important area.

Cooperative Advocacy
Cooperative advocacy and member education would hold key for ushering in reforms in cooperatives successfully and the recent efforts of NABARD with consultation from GIZ through the Centre for Cooperative Excellence hold promise if the legal reforms support them.
NABARD in its present form would 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 two 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, GoI would do well to institute a dedicated fund for the purpose. 

Cooperative Grants Commission should be set up by the Union Government to encourage promotional activities like member education, advocacy, technology infusion and governance. States should set up Cooperative Development Boards to oversee the reforms and to ensure networking of all the cooperative institutions to ensure that there is no overlapping of efforts and wastage of resources.

The Cooperatives enjoy vast network and penetration in the rural areas. Hence they will prove to be the best bet for financial inclusion. Jan-Dhan could penetrate deeper and faster through cooperatives than through the commercial banks and at much lower costs than now. 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 S.G. Patil. The time is ripe for action.