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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
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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
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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.
'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.
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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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
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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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