Role of Cooperatives in Financial INCLUSION

On July 2nd this year when National Cooperative Union of India (NCUI) observed International Cooperative Day, it also became an occasion to gauge commitment of our political leaders and the steel frame to the cooperative cause. None of the political leaders, who have used cooperative movement as a stepping-stone for political success and never tire of milking them to increase their connectivity and clout, thought it fit to join the function. In their absence, it was left to R K Tiwari, Joint Secretary in Union Ministry of Agriculture to be the face of the establishment.

Contrast this with Sri Lanka where President Mahindra Rajapaksa along with Cabinet Minister for Cooperatives Johnston Fernando not only were in attendance at a function in Kurunegala (North Western Province) but promised to formulate a national policy on the cooperative movement. Or Indonesia where again the top executive, President Susilo Bambang Yudhoyono, called for revitalisation of cooperatives while inaugurating a Cooperative Day opening ceremony in Senayan (Central Jakarta).

No wonder, many of the around 595,000 cooperatives including Maharashtra Sugar Industries, State Cooperative Banks, Agricultural Cooperative Credit Societies and 100,000 odd Primary Agricultural Cooperative Societies are either on the verge of closing down or reeling under a financial crisis with the mismatch between their cost and revenue widening by the day.

So much so that Reserve Bank of India (RBI) recently instructed Maharashtra government to replace the board of Maharashtra State Cooperative Bank (MSCB) with an administrator after a NABARD inquiry said that its board of directors conducted the affairs of the bank against the interest of the depositors, concealed non-performing assets, completely ignored the statutory orders of the RBI, sold properties of borrowing units acquired under the securitisation act much below the reserve price, sanctioned loans without authorisation from NABARD, waived huge interest amounts in violation of the cooperative societies act and enhanced credit limits to units having negative net worth.i In Bihar, only two out of 22 State Cooperative Banks have been allowed by the central bank to involve in banking activities.

In fact, the cooperative banking system has become less efficient, less stable over the years. A study by Skoch shows that the medium term loans issued by 31 State Cooperative Banks nosedived from Rs 13,98,900 in 2007-08 to Rs 906,003 in 2008-09 (-35 %). The study also concluded that credit growth to agriculture decelerated to 10.6 per cent in 2010-11 from 22.9 per cent a year earlier.

The foremost reason for doddering status of the cooperative banks is said to be government interference. MSCB for instance reportedly had a Maharashtra minister among the members of the board. Late Lakshmi Chand Jain, a champion of cooperative movement, once lamented on government meddling, “State sponsorship for the cooperative movement has killed the popular initiative. Instead of sehakari, it has become sarkari.”

The most shocking part is that policy makers in the country have even stopped looking at cooperatives as a means to bring about financial inclusion in the country.

The most shocking part is that policy makers in the country have stopped looking at cooperatives as a means to bring about financial inclusion in the country. The cooperatives have become a baby nobody wants to own up. “There is no mai-baap of cooperatives. Everybody wants to regulate a cooperative but nobody wants to really support it,” fumes J N L Srivastava, Managing Trustee, IFFCO Foundation. Srivastava would know because IFFCO Foundation, a cooperative set up by the fertiliser giant, provides special thrust on sustainable agricultural, social, economical and cultural development of its members along with empowerment of women and youth.

Srivastava is amazed that the executive authority, which has caused downfall of the cooperatives through unnecessary interference does not bother about them when it loosens purse strings for commercial banks. “Political interference is there. Member participation is weak. And financial base is very weak because nobody is bothered,” Srivastava rattles off. B Yerram Raju, Director (Projects & Research), Development and Research Services Private Limited, echoes similar concerns when he states, that “cooperatives are the early excluded category of the financial inclusion effort.”

Farmers are not the stakeholders for agriculture. It is the district agriculture officers who are the stakeholders in agriculture plan. (The end result is) we know agriculture but we don’t know the farmer.” M Moni, Deputy Director General, National Informatics Centre

Apart from interference, mismanagement and manipulation, the bane of the cooperatives comprises their restricted coverage, functional weaknesses, trust deficit and lack of awareness among the public. Not many in Gurgaon know that IFFCO has a cooperative despite walking past the company office every other day. Or for that matter how many people know about the mandate of NCUI or even NCCT (National Council for Cooperative Training).

One major problem is imbalance. The other problem is role of state governments and the role of Registrar of Cooperative Societies. That needs to be looked into.” N P Mohapatra, Deputy General Manager, NABARD

“Cooperatives lack brand image. There is a need to really build this brand image,” stresses Raju. He wants the corporate cooperatives like IFFCO to take a lead in this saying “building brand image for the cooperative should be a mission for the corporate cooperatives.”

“The trust deficit is, we (policy makers) do not trust the poor. And the poor, in return, do not trust us.” Trilochan Sastry, Professor, Indian Institute of Management – Bangalore

Functional weaknesses are the other area where the cooperatives really need to pull up their socks. Many a time elections for the cooperative boards are rigged or deferred for one reason or the other facilitating rule of the old boards. At times cooperative bigwigs divide important positions among themselves in the name of consensus and unanimity. Since many politicians have become members of the boards, their one point agenda is to curry favours and further their constituency through corrupt practices.

Also it would help if the cooperatives along with corporates devise an umbrella approach to impart skills to people in the interiors. Not only would it enable people to be aware and find employment but also ensure recovery of their loans.

Regrettably there is no awareness about skill development agencies and the job fairs that are organised from time to time. As far as sensitisation and awareness go, that is totally negligible. You go to any village and ask any ten youth about government schemes on skill development and the answer will be no, say exerts. A positive development is that IFFCO Foundation has joined hands with Skill Development Institute of India to work out a strategy to make rural people aware and teach them skills.

As far as regulation is concerned, the cooperatives in most states face overkill. Unfortunately despite repeated pronouncements about amending Multi-State Cooperative societies Act (MCSA), which grants near-blanket powers to the central and state governments to decide the fate of any cooperative, the central government has so far failed to do the needful. “Cooperatives happen to be in the band of institutions that are getting killed. While regulatory measures are needed we should not kill the institutions that they are seeking to regulate,” laments Srivastava.

“One major problem is imbalance. The other problem is role of state governments and the role of Registrar of Cooperative Societies (RCS). That needs to be looked into,” adds N P Mohapatra, Deputy General Manager of NABARD.

The cooperatives seem to suffer from trust deficit as well partly be cause the government or rather state bureaucracy does not allow them to take decisions or produce credible leaders from within and partly because there is mis-governance and mismanagement in the cooperatives. Trilochan Sastry, Professor, Indian Institute of Management, Bangalore, is more direct on why the poor members of the cooperatives do not trust the policy makers. “The trust deficit is, we (policy makers) do not trust the poor. And the poor, in return, do not trust us.”

Even in the case of cooperatives, the policy makers have continued to press for a top-down approach rather than a bottoms up approach. “Farmers are not the stakeholders for agriculture. It is the district agriculture officers who are the stakeholders in agriculture plan. (The end result is) we know agriculture but we don’t know the farmer,” points out M Moni, Deputy Director General, National Informatics Centre.

The imperative is that the states should have a change of heart and change of systems. Since PACs extend loans to small and marginal farmers, they should be developed into mini banks. “We should provide for their autonomy. Their elections should be held in time and they should be able to access the resource deposits,” Srivastava demands. Deposit Guarantee Corporation (DGC) should take care of deposits of the PACs, the way it does for Central Cooperative Banks.

Cooperative insiders are of the opinion that government’s loan waivers help only the rich and defaulting farmers and must be done away with. Their argument is that the frequent waivers leave cooperatives in the red as there are number of conditions for availing reimbursement from the government. For one the cooperatives have to wait for several years to get the reimbursements as departmental evaluation of the loans is an arduous and time consuming process. Besides, NABARD (National Bank of Agricultural and Rural Development) insists on government guarantee.

There is also a view that the loan waivers help only the big farmers. “The loan waiver (for Vidarbha farmers) has not helped the small and marginal farmers. Only rich and defaulters have gained from it. The waiver, I would say, is totally anti-small marginal farmer, anti-inclusion, financial inclusion,” says Srivastava, backed by others.

Since the credibility of the cooperatives is very low vis-à-vis the banks and the former scores over the latter when it comes to reach in the rural sector, it might help if there is collaboration between them. The banks should let the PACs and cooperatives mobilise deposits for them and be guarantors for the money they lend to the farmers. “Let them act as BCs for deposit mobilisation. Since lending is risky, the banks should share the risk. This will be cost effective, quick and will give results in the short term,” proposes K Ramesha, Professor, National Institute of Bank Management (NIBM). Ramesha also bats for government subsidy to the cooperatives adding that the ‘compensation is a must for meaningful participation of cooperatives in furthering financial inclusion.’

Instead of distributing input loans and loans for buying tractors, the cooperatives should give loans for value addition and marketing activities and think of creating a surplus for themselves. The government’s focus should also be on getting people out of poverty and not merely on providing loans to them. Sastry recounts his meeting with representatives of cooperatives from Netherlands, USA and Australia. “They only discussed how to make money in the cooperatives, not how to cleverly give loans to 25,000 million people,” he reminisces.

The need of the hour is that instead of flogging only commercial banks to open rural branches and talking of credit societies, we should make use of the entire available infrastructure (sugar cooperatives, spinning cooperatives, dairies etc) to put the excluded in the financial mainstream. There are 431 sugar cooperatives, 172 spinning cooperatives, 200 dairy cooperative plants, 500 chilling cooperative plants. There are also 18,000 fishing societies, 22,241 consumer stores with 8.4 million members, 42,000 labour cooperative societies, 92,000 primary household cooperative societies. Then there are fertiliser cooperatives and around 96,000 PACs of which 42,000 are run on profit. Cooperative banking holds deposits adding to Rs 6,000 billion. This is argument enough to use cooperatives for the cause of financial inclusion.