PERSPECTIVES

Future of Cooperatives in India

A Vaidyanathan

The cooperative movement in

India was started by far-sighted
colonial officials and later became
an instrument of the development
state in the post-Independence
era, never really becoming a
popular movement driven by its
members. As the cooperatives
have become central to
government policy on rural
credit, they have come to be
entrenched power centres for
doling out patronage, financial
help and political support. This
article proposes some measures
for their successful reform.

This is an expanded version of a lecture given

at an international conference on the future
of cooperatives in India organised by the
College of Agricultural Banking of the Reserve
Bank of India in Pune in December 2012. I am
grateful to M S Sriram for his comments and
suggestions in preparing this lecture.
A Vaidyanathan (a.vaidyanathan053@
gmail.com) is a well-known economist
and is currently on the board of the Reserve
Bank of India.

30

ndia recently celebrated the centenary of the establishment of cooperatives in the country. The first of
these societies were started on the initiative of colonial officials essentially as
the best way of enabling farmers to get
out of the clutches of usurious moneylenders seen as the major cause of widespread rural poverty. Gradually, the
scope got extended beyond agricultural
credit to cover numerous other activities
including production, finance, marketing and processing in a wide range of
sectors, as well as trading of several
important farm products, consumer
stores and housing. The scale of operations of cooperatives in India has grown
enormously in this one hundred years.
In 1951 the country, it is reported, had
1,81,000 cooperatives of all kinds with a
total membership of 15.5 million. In
2007-08, according to the National
Cooperative Union of India, there were
some 1,50,000 primary credit cooperatives with a membership of 180 million,
which disbursed over Rs 2,000 billion
in that year. There were some 2,60,000
non-credit primary societies of all
types with a reported membership of
nearly 250 million and an annual turnover (in 2004-05) of approximately
Rs 700 billion.
The expansion in the scope and reach
of cooperatives as a whole and in the
volume of their activity is impressive.
But the process has been highly uneven
across activities and regions. Its growth
has been, and continues to be, driven by
government actions rather than as a
mass grass-roots movement motivated
by the basic ethos and spirit of cooperative enterprise. The manner in which
they are organised and function are not
conducive to efficient and prudent use of
the vast resources at their disposal.
Mechanisms to ensure accountability for
efficient conduct of business and for
benefiting sections of the population
may 4, 2013

that they are expected to cater to are

weak and ineffective. With few significant exceptions, their finances are in a
chronic state of sickness and prone to
recurrent crises.
What are the factors and forces that
account for this unhealthy state of
affairs? What is the experience of efforts
to improve the performance of cooperatives? And what are the reasons that
they have not been effective? That these
efforts have been ineffective does not
mean that cooperatives are foredoomed
to failure. On the contrary, it is important to recognise that efficient and
vibrant cooperatives, organised and
managed as democratic, self-reliant and
self-managed institutions offer the best
means for the vast resource-poor and
resource-less segments of the countrys
population to improve their living conditions. My views are based on this conviction and also the belief that, though
obstacles to reform are too formidable
to be tackled frontally, it is possible,
through carefully planned and orchestrated efforts to circumvent and subvert the opposition, to generate strong
political pressures for genuine reform.
An Altruistic Measure
As mentioned earlier, the cooperative
movement owes its origins to the initiative of a few visionary officials of the
colonial government in the early 20th
century. The idea of establishing cooperatives of the type that were proving to
be successful in Germany was mooted in
the late 19th century. Concerned with the
acute poverty of the peasantry, aggravated by recurrent droughts, these cooperatives were seen essentially as a means
that would enable farmers to get out of
the clutches of usurious moneylenders.
It was soon evident that the basic concepts of the organisation and management of cooperatives did not strike roots
that were either strong or wide enough
on the ground so as to generate and sustain its growth. But the pioneering officials persuaded the colonial government
to adopt an active policy of encouragement and to provide support to nurture
these institutions.
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Weaknesses in the functioning of societies, their failure to promote thrift,

excessive dependence on state support,
and poor financial management became
manifest early on. Their persistence and
the need for corrective action too was
recognised. But the remedy was seen to
lie in tightening the laws and stricter
government supervision to ensure greater
discipline in their management, rather
than by addressing structural defects of
the institutions. The Royal Commission
on Agriculture (1927) endorsed this
approach and made strong recommendations for the continuance of state patronage for cooperatives on the ground
that the failure of cooperatives would
mean failure of best hope for rural India.
This strategy has been pursued ever
since. In the 1930s, the newly established Reserve Bank of India (RBI) was
mandated to play a central role in expanding and strengthening credit cooperatives by providing finances to enable
them to increase their lending capacity.
Gradually, the scope was expanded beyond agricultural credit to cover other
activities. The pace of expansion and diversification was slow and fitful in the
pre-Independence period but gathered
increasing momentum after 1947.
Development Policy Driven
State policy under planning attached a
great deal of importance to cooperatives
as a desirable form of organisation to enable small farmers, households and cottage industries to acquire greater bargaining strength in the economy, vis-vis the big players, through access to
credit, input and produce markets. More
generally, the concept of organising economic activity in a spirit of mutual help
and managing them democratically for
the benefit of members rather than for
profit had a wider moral and ideological
appeal to the leaders of that time. This is
reflected in the prominence given to
cooperation in the early five-year plans
and the vigorous efforts to encourage,
promote and support cooperatives. As a
result, there has been a phenomenal
expansion in the number of societies
and the range of activities covered.
With a few significant exceptions, this
growth is largely indeed mostly driven
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may 4, 2013

and sustained by government decisions

on the allocation of budgetary funds,
and on its policy of targeted expansion
of public funding of cooperatives at low
rates of interest. Similarly, public funding accounts for most of the resources
available for lending by cooperatives.
No comprehensive assessment of the
performance of cooperatives as a whole
is available, nor is it possible with the
available data. The subsequent observations relate to credit cooperatives. By far
the largest segment of cooperatives in
terms of coverage and volume of business, recurrent crises in their functioning and suggestions for reform have
been examined in depth by both academics and official committees.
Institutional lending to agriculture
and allied activities has recorded a
quantum growth during the last two
decades as a result of the governments
aggressive policy of expanding credit
to agriculture, as shown in Table 1.
Total disbursement in 1990-91 (Rs 128
billion) amounted to about 7% of the
countrys agricultural gross domestic
product (GDP). This increased to about a
third of agricultural GDP by the turn of
the century. By the end of the last decade it has grown further, though at a
slower rate, and amounts to nearly half
the agricultural GDP.
Lending by cooperative credit societies
grew much faster than that by banks
during the 1990s. Their share in total
institutional loan disbursements rose
from somewhat over a half in 1990 to
nearly three-fourths in 2001. Thereafter,
their share has been declining and is
placed at a little over half of the total institutional credit in 2007-08. Despite
this fall, cooperatives clearly remain the

major source of institutional credit to

agriculture and allied activities.
The rationale for aggressive expansion
of institutional lending to agriculture
and other priority sectors is that, being
poor and socially disadvantaged, they
cannot get credit from traditional informal sources or for that matter from commercial banks on a scale and at rates that
would enable them to increase the productivity of their own resources or avail
of other opportunities for raising their
incomes in a growing economy.
Inadequacy and high cost of credit are
indeed severe constraints facing most
rural households and small enterprises.
But, effectiveness of policy depends on a
realistic assessment of their overall
credit needs and also on ensuring that
credit of the magnitude required by different segments and for different activities actually reaches them. By this criterion the policy has been far less successful than the above figures suggest.
Boosting Agriculture
Most of the increase is on account of indirect lending to agriculture and allied
activities. Their share in total disbursements has increased from about a sixth
in 1990 to around a half at present. This
trend is also evident in cooperatives: indirect loans comprised about a fourth of
their total lending in 1990 and their share
is currently over 70%. Direct lending as a
proportion of agricultural GDP is currently nearly double the 1990 level, but hovers between 6% and 7% in recent years.
Their share in total direct institutional
loans has shrunk from close to half in
1990 to around 30% currently (Table 1).
The reach of the Primary Agricultural
Credit Societies (PACS) in terms of

Table 1: Growth of Institutional Credit to Agriculture and Allied Activities (Rs billion)
Agriculture GDP
Cooperatives and banks

Cooperatives

Direct lending
Indirect lending
Total
% of indirect to total
% of direct to GDP
Direct lending
Indirect lending
Total
% of indirect to total
% of direct to GDP

1990-91

2000-01

2004-05

2009-10

1,508
102
26
128
20
6.8
48
17
65
26
3.2

4,496
482
994
1,476
67
10.7
273
913
1,186
77
6.1

5,524
1,053
1,433
2,486
58
19.1
450
1,141
1,591
72
8.1

10,890
2,978
2,237
5,215
43
27.3
749
1,500
2,250
67
6.9

Source: RBI Handbook, 2010-11.

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PERSPECTIVES
Table 2: Primary Agricultural Credit Cooperatives
2001

2004

2011

Number
Thousands 98.2 108
93
Viable
Thousands 70 67
66
Potentially viable
Thousands 33 33
22
No of members
Million
102 127 121
No of borrowers
Million
55.5 45
52
Paid-up cap
Rs billion
44 56
75
of which govt
Rs billion
5
6
6
Reserves
Rs billion
25 36
69
Owned funds
Rs billion
69 92 144
Deposits
Rs billion 148 190 372
Borrowings
Rs billion 295 402 540
Total resources
Rs billion 511 684 1,057
Total loans issued
Rs billion 308 392 913
Total loans outstanding Rs billion 408 488 878
Total demand
Rs billion 341 478 902
Total collection
Rs billion 230 317 675
Total overdues
Rs billion 1,106 1,605 1,858
Source NAFSCOB.

Table 3: Regional Concentration of PACS and Their

Lending
Societies in S & W
Members in S & W
Borrowers in S & W
Borrowings
Total resources
Total L O
Demand
Collection

'000
Million
Million
Rs billion
Rs billion
Rs billion
Rs billion
Rs billion

48
50
37
155
382
273
235
137

46
43
46
68
18
33
236
312
489 1,053
306 603
268 576
170 445

Source: NAFSCOB.

membership, borrowers, and access to

credit from different segments of the rural population is also much less than
available data would suggest. According
to these data, which are unverified, PACS
have 52 million borrowers, one-third of
whom are small farmers and artisans
(Tables 2 and 3). The number of households in these categories accessing cooperative credit would be much smaller.
Moreover, given the uneven distribution
of cooperatives across and within regions, access to cooperatives is likely
to be much less than the average in
many areas.
This is corroborated by independent
estimates based on the National Sample
Survey Organisations (NSSO) household
surveys in 2002-03 which estimated that
only 13% of rural households report borrowing from cooperatives, banks and
other institutional sources. The incidence
of borrowing from institutions and its
volume per household increases with
the total value of assets per household.
Barely 5% of households in the lowest
asset classes report borrowing from
32

institutions compared to more than onefourth of those in the group with the
largest assets. Furthermore, the volume
of borrowings from cooperatives estimated by the NSSO is less than half the
volume of direct loans reported to RBI as
having been disbursed to agriculture
and allied activities. In the case of other
institutions, estimated volumes are 60%
lower than reported to RBI.
This is not surprising. In an effort to
provide cheap credit to rural areas, the
rates at which cooperatives are provided
funds, as well as rates charged to borrowers, are kept much below rates applicable to other borrowers. The differential is so large that it is highly profitable
to divert funds borrowed from cooperatives to other uses. Central agencies, earlier RBI and latterly the National Bank
for Agriculture and Rural Development
(NABARD), have neither the authority
nor the means to check the exploitation
of this potential for misuse of funds.
Weak Institutions
The legal framework in which cooperatives are to operate is framed by state
governments. Responsibility for ensuring compliance with that framework
also vests with them. But enforcement is
notoriously lax. Violations of the letter
and spirit of cooperative law regarding
election of boards, maintenance of proper
records and their audit, transparent and
objective processes in granting loans,
ensuring their proper use and recovery
of dues, have been endemic features of
cooperatives all over the country. Enforcing discipline through supervision of a
huge number of dispersed societies is
impractical. More active interventions
such as appointing government officials
to manage societies or superseding elected boards have also proved ineffective.
Though most of the resources of cooperatives come from public funds, there is
no mechanism to ensure prudent and efficient management of funds.
These difficulties have been greatly
aggravated with the phenomenal increase
in the volume of public funds channelled
through cooperatives, lowering of lending rates, and lax recovery, compounded
by periodic waiver of loans as a political
strategy of practically all parties for
may 4, 2013

garnering electoral support. The opportunities for acquiring power and patronage for personal and party gain by managing these funds led to locally well-todo and influential individuals and groups
to gain control of societies. Elections
became irregular, contentious and were
often rigged (or countermanded) to help
supporters of parties in power. The result
has been a progressive deterioration in
the financial health of the cooperative
credit system marked by a high proportion of societies running losses, with low
recoveries and huge overdues.
State governments did little to tackle
these problems, but actually aggravated
the problem by non-conduct of elections
and laxity in audits, by lowering interest
rates, and by not just condoning, but
actually facilitating non-recovery and
delayed recovery of dues. Attempts to
manage the problem through frequent
supersession of elected boards, interference in the operational decision-making
of societies at all levels, creating a common cadre of government employees to
manage operations of PACs, deputation
of government officials to top positions
in many institutions have proved ineffective. The condition of the cooperatives has continued to deteriorate. By
the late 1980s accumulated losses and
unrecovered loans reached unsustainable levels. At the same time political
pressures were growing for giving relief
to the debt ridden poor peasantry. In
1990, the central government decided to
implement a scheme for writing-off loans
to farmers, which in turn spawned several other schemes by states.
Subsequently, a number of national
level official committees were commissioned to suggest ways to revive and
revitalise cooperatives. They considered

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PERSPECTIVES

it appropriate for the government to

clear, at public expense, accumulated
losses and increase the capital base of
cooperatives to a prudentially adequate
level. The cost of such a package was
worked out. But it could not be implemented for lack of an agreement on the
sharing of costs bet ween the centre and
the states. These committees, for the
most part, also recognised the need for
major legal and institutional reforms to
free cooperatives from government
interference and make them efficient.
Undeterred by all this, the central
government intensified its commitment
to accelerate the expansion of rural
credit through cooperatives. Funding for
this increased rapidly and by huge
amounts. But with institutional deficiencies unattended, the financial health of
the system deteriorated and reached crisis proportions prompting the appointment of another Task Force in 2006 to
address the problem.
Like its predecessors, this committee,
the Task Force on Revival of Rural Cooperative Credit Institutions, too gave recommendations for the revival and revitalisation of the cooperative credit system
at public cost. The argument for this
remained the same, that other financial
institutions are both incapable of and/
or disinterested in providing adequate
credit at reasonable cost to asset-less and
asset-poor people in rural areas.
The Task Force worked out the cost of
restoring the system to a reasonable
state of financial health, by wiping out
accumulated losses and building up an
adequate capital base for the system.
The components of the financial package, the principles on which the size of
the package for each state, and the sharing of the costs between the centre, the
states and the cooperative system, as
well as the modalities and mechanisms
of implementation were spelt out. More
importantly, it recommended that both
eligibility for central assistance and its
release to state governments, and through
them to the individual cooperatives,
should be conditional on their agreeing
to a set of specific legal and institutional
reforms. Needed changes in the structure
and management of societies, and in
the legal framework essential to enable
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may 4, 2013

them to function as democratic, selfgoverning institutions, accountable to

their members without any government
involvement or interference in their
management, were spelt out.
Centre-State Cooperation
The central government, which set up
the Task Force, accepted the recommendations. But cooperation being a state
subject, concurrence by state governments
was essential. The centre took an unprecedented proactive initiative to
organise a series of high-level consultations with state officials and chief ministers. A political consensus which endorsed, in substantial part, the Task Force
recommendations was reached, with
state governments agreeing that they
should implement suggested changes in
law, governance and share in the costs, in
order avail of central assistance.
Most states have signed the formal
memorandum of understanding (MOU)
agreeing to make specified changes in
their laws and regulations. The audit of
the PACs accounts to determine the true
extent of accumulated losses has been
completed in some and is progressing in
others. Many, but not all, are reported to
have made the recommended legal
changes. The process of audit to determine the quantum of assistance is said
to be complete. A large part of the assistance is also reported to have been released, thereby enabling the PACS to revive their operations.
But subsequent events have thrown
considerable doubts about the willingness to implement the reforms in letter
and spirit. States acceptance of reforms
turns out to be more to prevent collapse
of cooperatives and get the central assistance for enabling them to resume
lending, than a genuine interest in implementing institutional reforms. Commitments agreed to by states in their formal
MOUs have not been implemented fully,
some not at all, and in several instances
implemented in a diluted form. Implementation is tardy and there are instances of reverting to old ways after receiving financial assistance from the centre.
For instance, in many cases elections
have not been held on schedule, and
when they have, they continue to be

vol xlviIi no 18

fought on party lines. Legislation providing for alternative cooperatives models and enabling PACS under existing
laws to shift to the new mode have not
been enacted, nor has the state governments stake in equity been reduced in
many cases. Further, audit continues to
be with the line department and its
timeliness and quality remain a source
of concern. Lastly, cooperatives continue
to be run by staff from the state cadre. In
short, state government interference
remains unabated.
Barely after the agreement was reached
on implementing the reform package, the
centre announced a comprehensive loan
waiver programme in the wake of sharp
reduction in output and incomes because
of drought, which, it was argued, made
it impossible for poor farmers to clear
their loan dues. In fact, however, only
half of the institutional loans are owed
by rural households, the major portion
of them comprising indirect loans and
the bulk of outstanding being accounted
for by a minority of asset-rich households. The relief to the majority of the
rural population on account of the waiver was marginal, at best. It only succeeded in undercutting the spirit of the
reform by reinforcing the already widespread expectation among better-off
borrowers that they can afford, with impunity, to not repay cooperative loans,
that political pressures can and will lead
to periodic waivers.
Assessing Performance
We do not have authenticated data on
the performance of the cooperative credit
societies to assess how all this affected
their performance. Unverified data published by the National Federation of
State Cooperative Banks (NAFSCOB) suggest a significant reduction in the total
number of societies as well as the
number of viable, and potentially viable,
societies. The number of staff in PACs
has come down, and the volume of lending, which had stagnated in the prereform years, has revived. The volume
has nearly doubled over a five-year period,
but it must be noted that in major part it
consists of indirect lending. Collection
rates are reported to hover around
65%-70%, at which rate no financial
33

PERSPECTIVES

institution depending wholly on borrowed funds can hope to survive for

long. The system is headed for another
crisis sooner or later.
There is reason for concern that the
functioning and management of credit
cooperatives may be worse than the data
suggests. NAFSCOBs compilation is based
on information supposed to be based on
audit reports of all societies conducted
by the registrars of cooperatives in
various states. It is well known that audits are done entirely by department officials and are neither regular nor comprehensive. Delays in the conduct of audits and submission of reports are widespread. Audit is limited to such accounts
as are available and reports seldom examine whether accounts and records are
complete, accurate and up to date. Neither the observance of procedures for
grant of loans and their recovery nor the
veracity of the reported characteristics
of borrowers are properly scrutinised.
There is a strong case for an independent survey of a sample of the societies in
order to get a reliable and realistic picture of the current status and functioning of the sector.
Cooperative leadership in states have
not reacted to, much less shown interest
in addressing, these deficiencies. This is
hardly surprising given the dominance
of political groups among them. Those
who control cooperative societies are
locally powerful, with strong political
affiliations. The political class as a
whole, irrespective of party, are loath to
dilute, let alone give up the power that
they get to garner electoral support,
reward their supporters and mobilise
funds from their control of cooperatives. Under the existing regime, they
are able to abuse this power brazenly
and with impunity.
A large number of government functionaries currently employed in these
societies also have status and power,
albeit on a much smaller scale. Not surprisingly, they are not enthusiastic about
any reform that would mean losing both.
Civil society organisations have evinced
little interest, much less activism, in exposing the large-scale corruption in
cooperatives, much less in fighting for
change. Under these circumstances the
34

prospects of restructuring this sector on

the scale that the government accepted
in principle seem very dim indeed.
Way Forward
The strategy, therefore, has to be to find
ways to make a dent in the opposition by
creating sanctions and incentives for implementing some key elements of reform
and open up spaces for exploring healthier forms and practices. In conclusion let
me outline some of the ways in which
this could be done.
First, programmes for training personnel for computerisation, internal management and record-keeping, as well as
improving the quality of audit of PACS,
proposed as part of the revival package
must be pursued vigorously. Second,
efficient and well-managed societies
should be motivated and facilitated to
introduce structural and managerial
reforms. The aim should be to transform them into models of true cooperatives that promote thrift, manage loans
and repayments efficiently, and use
surpluses for the collective benefit of
their members.
Third, successful and promising innovators need to be identified and brought
forward to demonstrate to the wider cooperative community, including politicians and bureaucracy, the possibilities
and impact of institutional reform. The
aim should be to mobilise opinion to
persuade and pressurise governments to
enact model cooperative laws and enable old model societies to migrate to
them. Fourth, civil society organisations
could play a useful role in mobilising
opinion in support of enabling and encouraging the spread of societies under
the model cooperative act. This is one
way to blunt the hold of the political
class to implement the much-needed institutional reform. Andhra Pradesh has
such a legislation that has made it possible to establish and operate cooperatives
as truly democratic, self-reliant, efficient
and dynamic institutions. Their strong
and proactive civil society lobby has
been able to thwart attempts to bring
them under the control of the registrar
of cooperatives, impede registration of
such societies and allow the old-model
ones to opt for the new model. This will
may 4, 2013

be useful to create pressures on the government and the political class from
within the cooperative movement for
implementing institutional reform of
wider scope and scale.
Simultaneously, the fifth point, NABARD
needs to play a more proactive role in inducing states to fulfil their commitments
to undertake radical legal and institutional reforms and eliminate governmental interference in their functioning.
NABARD can and should play an important role by (a) conducting a forensic audit of the loan portfolios of a representative sample of PACs in each state to check
the veracity of their records, of the characteristics of their borrowers and purposes for which loans have been given,
(b) impose penalties, including withholding of funds, for gross inaccuracies
and misfeasance, and (c) make continued access to NABARD funds conditional
on the implementation of grass-root level reforms specified in the MOUs signed
by the state government.
Sixth, the MOUs signed by states are in
the nature of contracts under which they
have undertaken commitments to implement a series of specific reform measures in exchange for substantial central
financial assistance. The possibility of
invoking judicial sanctions to enforce
these contractual commitments should
be seriously considered.
Finally, it is also necessary to get away
from insisting on supply-driven targets
for agricultural financing. It is high time
that greater attention is paid to the demand for credit from agriculture. This
calls for a careful review of the practice
of projecting credit requirements using
simplistic and untested assumptions
about the relation between output and
credit needs. A more disaggregated assessment of the nature and sources of
demand for short-term, long-term and
indirect lending, for different segments
of staple crops, horticulture, and animal
husbandry, as well as for post-harvest
processing and marketing are needed.

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