Bring in two-tier cooperative sector

Telangana is a trendsetting State proved its maturity in thinking, policy, performance and reforms. It’s unparalleled digital journey led to TSiPASS, T-Hubs, TIHCL, T-Valet, Ma Bhoomi and many a start up securing first rank in EODB. Its growth rates in agriculture and services thus far have put the state on top in the country.

It has set a new trend in governance getting closer to people with decentralising administration through the 31 districts carved out of 10 at the time of formation of the state. It has become a favoured state for investments. The State is firmly put on global radar with the Global Enterprise Summit and World Telugu Conference.  It is aware that the journey is unfinished and many miles to go. The visionary leadership of the Chief Minister saw a potential in cooperative sector if reformed through appropriate legislative interventions.  Here are a few thoughts for his consideration.

All the Primary Agricultural Cooperative Societies (PACS) except 14 that do not have either proper records or stuck up in frauds have been computerized. This assumes importance in the backdrop of the phenomenal failure of both the previous State Government and NABARD to computerize the short term cooperative credit structure. Funds released for the purpose through Vaidyanathan Package have been grossly misspent. District Cooperative Central Banks did not facilitate the process.

Amendments to the erstwhile AP State Cooperative Act 1965 and 1994 suffered implementation failure at the hands of the vested interests. 97^th Constitution Amendment Act 2012 suggested by Government for the state adaptation by January 2013 was not taken forward as it would have placed the cooperatives as instruments of economic development through proper governance and apolitical agenda.

The State has an ill-gotten legacy of 3-tier Rural Cooperative Credit Structure: Telangana State Cooperative Bank (TESCO-Scheduled) at the State level; District Cooperative Central Banks (DCCBs-10) and the PACS. Several States in the country have only two tier structure. Apex Bank, its branches and PACS. Such two-tier structure led to reduction of intermediation costs and leakages in the funds reaching the poor. At the insistence of RBI all the DCCBs have embraced core banking solutions and Basel II norms of capital regulation. But they still are neither secured havens for depositors nor responsible credit outfits for borrowers. The question before the Government of Telangana should therefore be: why carry this ill-gotten legacy?

There are arguments and counter arguments on which tier should be axed if it were to take to structural reforms in cooperative sector: DCCBs are expensive outfits. Their Boards are formed out of the PACS and they would be running the accounts of PACS and release funds to the latter adding their intermediary costs to the funds they secure from the APEX Bank. They have never added value to the PACS. Whatever benefits any scheme should carry to the clients of PACS, namely, small and marginal farmers, artisans, village crafts persons, retail vendors, have not reached fully because of inefficient delivery by the DCCBs. The repeated frauds and misappropriations in districts like Warangal DCCBs should ring warning bells on this tier.

PACS on the other hand carry the unique advantage of extending services to the farmers in addition to extending credit. In the earlier dispensation, these PACS – member-driven and member-controlled and member-serviced organisations – were the first step for political careers of many a politician today. Systems were manually driven. Credit decisions were all maneuvered and they have become havens of benami transactions. Audits by the department lacked necessary rigour as the department auditors lacked knowledge of double entry book keeping introduced by NABARD through accounting reforms post Vaidyanathan Committee. Accounting books were kept open beyond March 31 every year to accommodate recoveries even up to June 30 and they lacked integrity. All these have now been rectified with computerization of PACS. PACS can now access Ma Bhoomi record to verify the asset behind the farmer prior to extending credit to him. Mirror accounts can be seen online by the Apex Bank or DCCB that finances the PACS. In addition PACS can extend services like selling all inputs virtually at the door steps of the farmers; procure the produce; run a petrol bunk; construct a godown/warehouse and enable a farmer to store the produce; market the produce at a vantage price for the farmer. It can also set up processing plants and add value to the produce right at the farmer’s door step. It can also set up a retail stores. These multiple activities cannot be performed by the DCCB. NABARD’s Development of PACS Project has incentives for multi-functional PACS.

All that is required is investment in PACS for efficient management and secretarial support that can better come from the Apex bank than the DCCBs. Direct transmission of funds from the Apex Bank to the PACS will bring gains to the members by way of reduced interest rates and effective supervision. On top of this, PACS can also serve as BCs. PACS if feel starved of resources can opt to a commercial bank for affiliation without sacrificing the principles of cooperation and within the provisions of the State Cooperative Act. PACS can also directly implement both life and crops insurance schemes.

Reforms of the computerized short term rural cooperative credit structure through a two tier cooperative structure in the state will reinvigorate them. But such reforms should be through better law and governance. Elections to the PACS for the first time in Telangana will be through State Cooperative Election Commission. Even if the elections are fought on party tickets those elected to the Cooperative Boards of PACS should be barred by law to enter the legislative bodies –either assembly or council during their tenure in PACS so that these member-representatives would devote their energies for their better functioning.

Commercial Banks are slowly moving away from the rural areas as they are not profitable. People are vexed with their services. Alternative rests in cooperatives. In an era of regulatory rigor and high capital adequacy norms under Basel III, UCBs in the existing format cannot afford to be competitive and extend the intended service to the members. UCBs have to be tech-savvy and put in place the needed cyber security systems on par with the commercial bank branches and the required costs cannot be recovered with limited clientele bases.  Therefore, Urban Cooperative Banks (UCB) should consolidate, capitalise, and close unviable entities if they would like to continue. Members as owners of UCBs should be able to refurbish capital required and there can be no recapitalization as in the case of PSBs.

In either case governance holds the key. Management should be professional right at PACS level where patronage should distance from staff appointments to PACS and Board Members should be trained in oversight on a regular basis and NABARD has appropriate training packages.

Published in Telangana Today, on 6th January 2018.