Draft Final Report
of the
Cooperative Credit Institutions
|
Sr. No. |
Particulars |
Page No. |
|
1 |
Chapter 1:
Introduction |
1-7 |
|
2 |
Chapter 2:
Evolution of the
Cooperative Movement |
8-15 |
|
3 |
Chapter 3: Nature and Extent of
Impairment and Remedial Measures |
16-40 |
|
4 |
Chapter 4: General Approach and
Financial Restructuring |
41-63 |
|
5 |
Chapter 5: Institutional, Legal and
Structural Reforms |
64-80 |
|
6 |
Chapter 6: Implementation Mechanism |
81-89 |
|
7 |
Chapter 7: Transitional Problems and Long Term
Outlook |
90-95 |
|
List of Annexures |
|
Annexure I : Notification of
Government of |
|
Annexure II : Venue of Meetings of
Task Force |
|
Annexure III : List of Cooperators /
Academicians / Bankers Invited for Interaction with Task Force |
|
Annexure IV : Classification of PACS
as per their Financial Position (2002-2003) |
|
Annexure V : State-wise / Agency-wise
Ground Level Credit (GLC) Disbursements for Agriculture and Allied Activities
(2002-2003) |
|
Annexure V(A) : Ground Level Credit
Flow from Various Agencies to Agriculture Sector (1992-1993 to 2004-2005)
(Share of Short Term and Medium / Long Term Agricultural Credit and their
Growth Rates) |
|
Annexure V(B) : Ground Level Credit
Flow of Various Agencies for Agriculture Sector – Selected Years (Share of
Cooperative Banks in Agricultural Credit and its Overall Growth Rate) |
|
Annexure V(C) : Ground Level Credit
Flow from Various Agencies to Agriculture Sector during 1992-1993 to
2004-2005 (Share of Cooperative Banks in Agricultural Credit and its Overall
Growth Rate) |
|
Annexure VI : Management in SCBs/
DCCBs |
|
Annexure VII : Involvement of the
State Governments in Management of Cooperative Credit Institutions |
|
Annexure VIII : PACS in Profit During
2001-2002 and 2002-2003 |
|
Annexure IX : Highlights of Regional
Performance of DCCBs (Based on the Average performance of 5 years) |
|
List of Annexures (contd.,) |
|
Annexure X : Costs and Margins of
DCCBs – Range and median Values |
|
Annexure XI : Average Performance of
DCCBs over 1999 to 2003 According to Profitability Classes |
|
Annexure XII : Average Performance of
DCCBs over 1999 to 2003 According to NPA Classes |
|
Annexure XIII : Average Performance
of DCCBs over 1999 to 2003 According to Recovery Classes |
|
Annexure XIV : Amount of Loans Issued
by PACS During 2002-2003 |
|
Annexure
XV(A) : Amount of Loans Outstanding in respect of PACS as on |
|
Annexure
XV : Number of PACS having Godowns During 2002-2003 |
|
Annexure
XVI : Composition of Loans of PACS (using 5 district PACS data) |
|
Annexure
XVII : Staff Productivity of PACS – State-wise |
|
Annexure
XVIII : Share of Deposits According to Type for DCCBs |
|
Annexure
XVIII(A) : Share of Deposits According to Ownership for DCCBs |
|
Annexure
XIX : Frequency Distribution of DCCBs According to Profitability (selected
States) |
|
Annexure
XIX(A) : Frequency Distribution of DCCBs According to NPA % (selected States) |
|
Annexure
XIX(B) : Frequency Distribution of DCCBs According to Recovery % (selected
States) |
|
Annexure
XX : Mutually Aided Cooperatives Societies Act – Model Draft |
|
Annexure
XXI : Special Chapter for Financial Cooperatives |
|
Annexure
XXII : Draft Memorandum of Understanding |
CHAPTER
- 1
1.01 Rural
Cooperative Banking and Credit Institutions play an important role in meeting
the growing credit needs of rural
1.02 The
Government of
Chairman
Prof. A.
Vaidyanathan, Emeritus Professor, Madras Institute of Development Studies,
Chennai.
Members
Shri M Rama
Reddy, President, Sahavikasa Cooperative Development Foundation,
Prof. M. S.
Sriram, Indian Institute of Management, Ahmedabad
Shri A. K.
Singh, Additional Secretary, Ministry of Agriculture, Department of Agriculture
and Cooperation (nominated by the Union
ministry of Agriculture, Government of India)
Shri H.S.
Chahar, Secretary, Cooperation, (now Principal Secretary) Government of Orissa
(nominated by the State Government of Orissa)
Shri L. M.
Chaube, Managing Director, U.P. State Cooperative Bank (nominated by the State
Government of Uttar Pradesh)
Shri U. C.
Sarangi, Commissioner for Cooperation and Registrar of Cooperative Societies,
Government of Maharashtra (nominated by the State Government of
Maharashtra)
Member Secretary
Shri. Y. S. P.
Thorat, Managing Director, NABARD
Permanent Invitees
Shri A. V.
Sardesai, Executive Director, RBI, Mumbai.
Shri K. D.
Zacharias, Legal Advisor, RBI, Mumbai.
The Terms of reference of the Task
Force
1. To recommend an implementable action plan
for reviving the Rural Cooperative Banking Institutions, taking into
consideration, inter alia, main recommendations made by various committees in
this regard.
2. To suggest an appropriate regulatory framework and the amendments which may be necessary for the purpose in the relevant laws.
3. To make an assessment of the financial
assistance that the Cooperative Banking Institutions will require for revival,
the mode of such assistance, its sharing pattern and phasing.
4. To suggest any other measures required
for improving the efficiency and viability of Rural Cooperative Credit
Institutions.
1.03 The Task Force was required to
submit its report by
1.04 The Task Force held eight meetings
between September and December 2004 at Mumbai, Chennai, Kolkata,
1.05 At its very first meeting, the Task
Force considered the submissions of representatives of the long term credit
institutions, that restructuring these
institutions should also be considered. The Task Force appreciated the validity
of their concerns. It recognises that
the revival of the long term cooperative credit structure is no less important
than that of its short term counterpart. The nature, magnitude and complexity
of the issues relating to such institutions are, however, quite different from
those of institutions of the short-term structure.
1.06 Moreover, since the time available to the
Task Force was limited, it was unanimously decided to focus first on designing
an action plan for the short-term structure, covering all tiers (including the
primary
agricultural credit societies) in the first phase and, if time
permits, to
take up the issues pertaining to the long term structure. As things turned out,
however, this has not been possible. The Task Force, therefore, recommends that
the Union Government consider setting up a Committee to examine the issues
pertaining to the long term cooperative credit structure on the lines of the
terms of reference assigned to it.
1.07 At its first meeting, the Task Force
considered various issues pertaining to its approach and methodology. The Task
Force noted that the current status of cooperative credit institutions, their
weaknesses and underlying reasons, as well as measures to remedy them, have
been widely discussed and analysed both in literature and more specifically in
the reports of the previous committees. The reports of the recent committees
listed below, were considered in particular.
a. Task Force to study the functioning of
Cooperative Credit System and Suggest Measures for its Strengthening (Capoor
Committee, 1999)
b. Expert Committee on Rural Credit (Vyas
Committee, 2001)
c. Joint Committee on Revitalisation Support
to Cooperative Credit Structure (Vikhe Patil Committee, 2001).
1.08 Apart from relying on the findings of the
earlier committees, the Task Force also collected substantial statistical data
on the coverage and financial aspects of cooperative credit institutions from
published and readily available sources. It also analysed these data to
highlight differences across and within States in performance indicators and
trends therein. The Task Force also sought to collect information on selected
aspects of their governance, through the regional and district
offices of the
National Bank for Agriculture and
Rural Development (NABARD).
1.09 The Task Force also had extensive discussions
with senior officials of State Cooperation Departments, managers and chief
executives of cooperative credit societies, leading cooperators with deep
involvement and experience in the cooperative movement, representatives of
trade unions of employees of cooperatives, apart from academics and non
government organizations (NGOs) well versed on cooperative credit.
1.10 These consultations were held to ascertain
their perceptions and views on the current status of cooperatives, including
issues relating to governance and management, the role of the State Governments
and the extent of their intrusion or otherwise, into the affairs of the
cooperatives. The Task Force invited their views on factors that have impeded
cooperatives from becoming autonomous and member driven institutions, and the
strategy for their revival and revitalization. During the eight meetings held
in different parts of the country, the Task Force was able to exchange views
with about 150 cooperators, academics officials etc., from as many as 23
States. A number of organisations also sent in written memoranda.
1.11 A sub-group of the Task Force headed by Shri
U. C. Sarangi, also visited several states for more detailed interactions. The
sub-group had the benefit of discussion with officials, cooperators and
cooperative bankers. At the third
meeting of the Task Force, it was felt that the revival strategy needed to be
premised on a strong legal and regulatory framework. Accordingly, a sub-group was constituted
under Shri Rama Reddy to suggest amendments deemed appropriate in the Banking
Regulation Act, State Cooperative Societies Acts, and Mutually Aided Cooperative
Societies Act, which would create a legal environment enabling cooperatives to
function as autonomous and member driven institutions.
1.12 The inputs from this sub group and a special
consultation with officials and non-officials with first hand knowledge of
cooperative law, its administration and problems in changing the law, have been invaluable to the Task Force in
clarifying its understanding of the issues involved, and in helping to formulate its recommendations.
1.13 The Task Force records its appreciation and
thanks to the cooperative credit institutions across the States, the Reserve
Bank of India (RBI), NABARD, NAFSCOB, and various State Governments and the
numerous individuals and organisations which personally participated in the
consultation meetings and those who gave their views in written memoranda.
(Names of persons from different States who interacted with the Task Force as well as those who sent written memoranda
are given in Annexure III).
1.14 The Task Force also met Dr Y. V. Reddy,
Governor, Reserve Bank of
1.15 The Task Force has a special word of
commendation for the Secretariat set up for it by NABARD. While each member of
the Secretariat has contributed in shaping the conclusions and recommendations
of the report, we would especially like to mention the inputs received from Dr
Prakash Bakshi, Chief General Manager, Tamil Nadu RO of NABARD, who not only
coordinated the operations at the Chennai end, but provided significant support
to the thinking process. The Task Force would like to mention the meticulous
attention to detail, which Dr. A. S. Patil brought to bear on the logistical
and operational aspects as well as in collating and analysing inputs received
from various quarters. This facilitated the work of the Task Force.
1.16 S/Shri S. Muralidaran, T.
Ravichandran and D. V. Ramana Rao, are commended for their professional
expertise and their general good cheer despite the pressure brought to bear on
them. Our thanks are due to S/Shri R. V. Ramakrishna, S. Kannan, Anandan, Smt. Mina Anthony, Smt. Vidya and Shri Sriram Iyer, for
relieving the Secretariat of all the tiresome details. Apart from the personnel
of NABARD, we are also grateful to the Reserve Bank of
1.17 This is the final draft of the
report and is being put on the Internet to invite comments and reactions from
interested members of the public. The Task Force will finalise the report for
submission to the Union Government, after taking these comments into account
and making such changes as deemed appropriate, consistent with the basic thrust
of its arguments and recommendations.
A.Vaidyanathan Y.S.P.Thorat
Chairman Member
Secretary
CHAPTER
- 2
Evolution
of the Cooperative Movement
2.01 The Indian cooperative movement was initiated
by the government. It spread and diversified with the encouragement and support
of the government. Its present condition is also to a great extent because of
the intrusive involvement of, and interference by the government. This chapter
provides a brief review of the various phases of the evolution of cooperatives
in general, and of credit cooperatives in particular, over the past century.
The First Phase: 1900-1930
2.02 By the beginning of the 20th Century,
officials of the colonial government perceived the Indian farmers’ dependence
on usurious moneylenders to be a major cause of their indebtedness and poverty.
At that time the cooperative movement had become well established in
2.03 The passage of the Cooperative Credit
Societies Act in 1904, and the enactment of a more comprehensive Cooperative
Societies Act in 1912 marked the beginning of a government policy of active encouragement
and promotion of cooperatives. This thinking gained wide acceptance and was
adopted as a policy by provincial governments and thereafter, “cooperation”
became a provincial subject in 1919. The persistence of government interest in
cooperatives and the importance attached to them was reflected in the
appointment of three different Committees to review their growth and
functioning.
2.04 The classic study by Frederic Nicholson,
followed by the Edward Law Committee on Cooperative Legislation, confirmed and
reiterated the need for the State to actively promote cooperatives. A decade
later, the Maclagan Committee (1915) advocated that “there should be one
cooperative for every village and every village should be covered by a
cooperative”. The Royal Commission on Agriculture in
2.05 It was the Royal Commission which made the
observation “if cooperation fails, there will fail the best hope of rural
The Second Phase: 1930 - 1950
2.06 The major development during this phase was
the role played by the Reserve Bank of India (RBI). The Reserve Bank’s concern
and involvement in the sphere of rural credit stemmed from its very statute of
incorporation. Specific provisions were made in the Reserve Bank of India Act,
1934 both for the establishment of an Agricultural Credit Department (ACD) in
the bank and for extending refinance facilities to the cooperative credit
system. Emphasis was laid on setting up, strengthening and promoting
financially viable provincial cooperative banks, central cooperative banks,
marketing societies and primary agricultural credit societies in each province.
The RBI, since 1942, also started extending credit facilities to provincial
cooperative banks for seasonal agricultural operations and marketing of crops.
2.07 The Government policy during this phase was not as pro-active on promoting cooperatives as before. There seemed to be a policy lull until 1945, when the Agricultural Finance Sub-committee and the Cooperative Planning Committee were set up by the Government of India (GoI). By then, there already were signs of sickness in the Indian rural cooperative movement. A large number of cooperatives were found to be saddled with the problem of frozen assets, because of heavy overdues in repayment. The Sub-committee’s recommendation that the frozen assets of the members of such cooperatives be liquidated, by adjusting the claims of the society to the repaying capacity of the members, marked the beginning of State interference in the management of cooperatives and the consequent erosion in the credit discipline of the members. The Cooperative Planning Committee identified the small size of the primary cooperative as the principal cause of failure. It also advocated State protection to the cooperative sector from competition.
The Third Phase: 1950 – 1990
2.08 After
2.09 State policy came to be premised on the view
that the government should ensure adequate supply of cheap institutional credit
to rural areas through cooperatives. The thinking then was that if the
institutions that were meant to deliver such cheap institutional credit failed,
there either had to be reorganisation of existing institutions, or creation of
new types of institutions. The Hazari
Committee recommended integration of short term and long term structures. The
Bawa Committee (1971) recommended setting up Large Multi-purpose Cooperatives
in tribal areas. The National Commission on Agriculture (1976) recommended
setting up Farmers Service Cooperative Societies with the active collaboration
of the nationalised banks.
2.10 NABARD was created on the recommendation of
the CRAFICARD (Sivaraman Committee 1981). The State’s heightened interest in
and concern for the performance of cooperatives in the country was obvious. The
focus, however, was on expanding and reorganising the State supported
structures, without addressing the tasks of restoring and strengthening
autonomy, mutual help and self-governance,
that are the cornerstones of genuine cooperatives.
2.11 The State gave primacy to cooperatives as the
sole means of delivering institutional credit to rural areas and injected large
and increasing amounts of funds directly. Upper tier cooperative banks were
encouraged to accept public deposits and borrow from other financial
institutions. However, the system was soon found to be burdened by growing
overdues. In keeping with the national priority of financing the rural sector
adequately, the involvement of commercial banks was first suggested as a social
control measure. The involvement of commercial banks was thereafter
institutionalised through the nationalisation of major commercial banks in
1969. During the post-nationalisation period, there was an unprecedented
penetration of commercial banks in the rural sector. This trend, however, was
accompanied by rigid policy directives right down to the micro level on cost of
credit, purposes, categories of borrowers, geographical areas, etc.
2.12 As the financial involvement of the
government in cooperatives increased, its interference in all aspects of the
functioning of cooperatives also increased. The consequent interference with
the functioning of the co-operative institutions, often compelling them to
compromise on the usual norms for credit worthiness, ultimately began to affect
the quality of the portfolio of the cooperatives.
2.13 Instead of tackling the root cause of their
weaknesses, the State took responsibility for strengthening the institutions,
by infusing additional capital and “professional” workforce. Both the State and
the workforce then began to behave like “patrons”, rather than as providers of
financial services. Whenever any professional organisation is in trouble, it
usually finds its own solution by re-negotiating the terms with its financiers
and re-visiting its operating strategies. However, in the case of the rural
financial institutions, the State has always provided a “solution”,
irrespective of the need of the recipient organisation, thereby donning the
role of a “patron”.
2.14 In due course, political expediency also led
to laxity in ensuring quality of credit and its repayment. The Government of
India’s 1989 scheme for writing off loans of farmers, greatly aggravated the already
weak credit discipline in the cooperative system and led to the erosion of its
financial health. It also set up an unhealthy precedent and spawned a series of
schemes by the State Governments, announcing waivers of various magnitudes,
ranging from interest write off to partial loan write-offs. The competitive
populism adopted by the political class has severely impaired the credibility
and health of the cooperative credit structure.
2.15 The State has used co-operatives to channel
its development schemes, particularly subsidy-based programmes for the poor. As
these institutions have a wide reach in the rural areas and also deal with
finances, the choice was natural. The trend, however, also made cooperatives a
conduit for distributing political patronage. This and the sheer magnitude of
resources and benefits channelled through the societies, makes control of
decision-making and management attractive to parties in power, for
accommodating their members, to influence decisions through directives, and for
individual politicians to be on the management boards of the cooperatives.
2.16 Concerns about these trends and the need to
overcome them began to be voiced around this time. The Agriculture Credit
Review Committee (Khusro Committee, 1989) for the first time, talked of the
importance of encouraging members’ thrift and savings for the cooperatives. It
also emphasised the need for better business planning at the local level and
for strategies to enable cooperatives to be self-sustaining. To this end, the Committee
was also in favour
of serving non-members, if it made business sense. In a sense, there were
larger macro economic changes on the anvil in the economy. The 1990s witnessed
more concerted attempts both by the government and by non-official
organisations and
cooperators, to explore ways to revitalise the cooperatives.
The Fourth Phase: 1990s and onwards
2.17 During the last fifteen years, there has been
an increasing realisation of the destructive effects of intrusive State
patronage, politicisation, and the consequent impairment of the role of
cooperatives in general, and of credit cooperatives in particular, leading to a
quest for reviving and revitalising the cooperative movement.
2.18 Several Committees (notably those headed by
Chaudhry Brahm Perkash, Jagdish Capoor, Vikhe Patil and V S Vyas) were set up
to suggest cooperative sector reforms during this period. The Brahm Perkash
Committee emphasised the need to make cooperatives self-reliant, autonomous and
fully democratic institutions and proposed a Model Law. Subsequent Committees
have all endorsed this recommendation and strongly supported replacing existing
laws with the proposed Model Law. They have also recommended revamping and
streamlining the regulation and supervision mechanism, introducing prudential
norms and bringing cooperative banks fully under the ambit of the Banking
Regulation Act, 1949. To facilitate the implementation of these reforms, they
proposed that governments provide viable cooperative credit institutions with
financial assistance for recapitalisation.
2.19 Progress in implementing these suggestions
has been very tardy because of the States’ unwillingness to share in costs and
their reluctance to dilute their powers and to cede regulatory powers to the
Reserve Bank of India (RBI). The passage of the Mutually Aided Cooperative
Societies Act by the Andhra Pradesh government in 1995, however, marked a
significant step towards reform. Following the example of Andhra Pradesh, eight
other States (viz.,
2.20 In all cases these new laws provide for
cooperatives to be democratic, self-reliant and member-centric, without any
State involvement or financial support. They provide for cooperatives
registered under the old law to migrate to the new Act. The old Acts were not
repealed, nor was there any serious effort to encourage and facilitate the
conversion of old cooperatives to come within the purview of the new Act. Most
existing cooperatives, therefore, continued to adhere to the old law.
2.21 The new law, however, did lead to the
emergence of a “new generation autonomous financial cooperatives”, albeit
slowly and unevenly across the country. While the number of cooperatives
registered under the new liberal Act is slowly picking up, the conversion from
the old law to the new Act has largely been in the arena of commodity
cooperatives. The reason for the slow pace at which both credit cooperatives
and the primary agricultural credit societies (PACS) are adopting the new law
is largely because they are not eligible for refinance under the existing legal
and structural arrangements.
2.22 As will be evident from the next chapter,
these developments have not made much of an impact on the way cooperatives
function. The movement has continued to deteriorate and reached the point that
necessitated the appointment of the present Task Force, which has been
entrusted with the task of coming up with an implementable action plan for
carrying the reforms forward.
CHAPTER - 3
Nature and Extent of Impairment and Remedial Measures
3.01 The first section of this chapter reviews the
institutional arrangements for providing rural credit and the role of the
Cooperative Credit Structure (CCS). It then examines the various levels of
impairment at the financial, governance and managerial fronts. Even though
these issues are well known and widely discussed in general terms, the chapter
(and related Annexures) seek to present a more detailed quantitative picture of
these features and highlight the nature and extent of their variation in
different tiers and States. The second section reviews the reform measures
suggested by earlier committees and the outline of the approach of the Task
Force in formulating its recommendations on the Revival Package (RP). But
before doing so, a brief discussion on the weaknesses in the basic data and the
need to improve it seems to be in order.
The Information base
3.02 The Task Force has relied mainly on
secondary data relating to various aspects of different tiers of the CCS at the
State level, supplemented with information compiled through specially commissioned
but selective, inquiries through the regional offices of the National Bank for
Agriculture And Rural Development (NABARD). These data along with some analysis
based on them, are presented in a series of Annexures to this report.
3.03 The secondary data used in this
chapter and elsewhere, are from two sources – the NABARD and the National
Federation of State Co-operative Banks (NAFSCOB). Ideally, the Task Force would
have preferred to rely on data put out by NABARD. It was not able to do so,
partly because NABARD’s database was mainly focused on the intermediate and
apex tiers, and partly because it did not have the break up required by the
Task Force.
3.04 While using the data it soon became
apparent to the Task Force that the statistical data reporting and compilation
relating to the cooperative sector leaves much to be desired. The Task Force
found that:
• The data are not up-to-date and
validated,
• There are no uniform formats for
collecting and presenting data
on comparable concepts and categories,
and
• There are significant variations in the
data obtained from
different sources for the same period
and parameters
These deficiencies are particularly serious in the case of primary agricultural societies (PACS). The Task Force also found that states have their own varying rules for accounting and disclosure of financial accounts of cooperatives, in most cases there are no separate rules for financial cooperatives and that the rules are in any case not consistently applied so it is very difficult to compare financial cooperatives’ financials across time, states and with other financial sector players.
3.05 The Task Force would like to
underscore the importance of consistent reporting and disclosure of financial
accounts as per generally accepted accounting norms for financial sector
players as well as making available sufficiently detailed, comprehensive,
up-to-date and authenticated data on the functioning of cooperatives and other
agricultural financing institutions to the public domain. This is necessary
both for monitoring, operations and policy formulation by the top management of
NABARD, as well as for use of policy makers in other financial institutions and
government. The Task Force notes that NABARD has taken over the responsibility
of bringing out the publication Statistical
Statements Pertaining to the Co-operative Movement in India, once done
regularly by the Reserve Bank of India (RBI). The NABARD’s latest published
compilation, however, provides data only up to 1997-1998. A special effort was,
therefore, needed to get more up-to-date data for the Task Force. To ensure that financial reporting by
financial cooperatives is consistent with generally accepted accounting norms
for financial sector players , the Task Force recommends that NABARD work with
the Institute of Chartered Accountants of India to develop and publish
appropriate accounting standards and that the use of these for financial
reporting be made mandatory through appropriate rules under the state
cooperative laws.
3.06 To ensure that data on the credit
system is collected and used meaningfully, the Task Force recommends that
NABARD take immediate steps to devote sufficient resources and personnel to
handle the task. The Task Force also recommends that NABARD set up a Department
of Statistical Analysis, suitably staffed by appropriately qualified human
resources at the very earliest. The effort would be in the nature of a public
service by this institution. The NABARD’s top management should also
institutionalise arrangements for systematic analysis and interpretation of
emerging trends in rural credit, as well as analysis relevant for specific
issues of policy.
Salient features of the CCS
3.07 The short term Cooperative Credit
Structure (CCS) has a federal three-tier structure with PACS being the grass
root level institutions, the Central
Banks at the District level (DCCBs) and the apex Bank at the State level (SCB). In the
3.08 The Task Force has relied primarily
on the data base available with NABARD, as far as SCBs and DCCBs are
concerned. Data on source-wise deposits
and sector-wise loans outstanding are taken from NAFSCOB. The Task Force noted
that NABARD does not maintain any data base on PACS. The only source is the NAFSCOB compilation,
based on information provided by the State Governments and the CCS. Hence, the
Task Force has used the data published by NAFSCOB as far as PACS are concerned.
There are, however, considerable doubts about how complete their coverage is,
whether the data are up-to-date and whether there is any attempt at validating
the data. The data on PACS, therefore,
need to be used with caution and then too should be limited to getting a
broad picture of their characteristics.
3.09 According to the NAFSCOB
compilation, there are 1,12,309 PACS, which works out to roughly one PAC for
every six villages in the country. The societies have, therefore, a wider
spread and reach in rural
3.10 The total membership of the PACS is
reported to be around 12 crore. Scheduled Castes and Scheduled Tribes and small
farmers each, are reported to account for about 36 per cent to 37 per cent of
the PAC membership as per NAFSCOB. Only
half the members are borrowers - this proportion being less than average among
small and marginal farmers and least among Scheduled Castes. These figures, it
must be reiterated, are only indicative.
3.11 Even in terms of basic functions,
there is a considerable diversity across
States. In some regions there are a few pure thrift and credit societies that
generate resources only from members and do not have financial transactions
with non-members. In
3.12 According to NAFSCOB estimates,
which, as mentioned before, needs to be treated as indicative rather than
precise, 62 per cent of the PACS in the country are viable, 30 per cent are
potentially viable and eight per cent are either dormant, defunct or under
liquidation. Here again, there are considerable variations across States (see
Annexure IV)
3.13 There are also differences in the
structure of the CCS. Most States, for instance, have different structures for
purveying long term (LT) and short term (ST) credit, but Andhra Pradesh has a
single unified structure for providing
both long term and short term loans. Most States have a three-tier structure,
comprising PACS, DCCBs, and SCBs. While in
3.14 Apart from the diversity at regional
levels, the level of development in terms of accounting practices, supervision
and prudential norms vary. The upper tiers, viz., SCB and DCCB, are supervised
and follow most of the prudential and accounting norms. These norms, however,
are not applied to the primary level cooperatives. It is important to keep this
factor in mind, while using the financial data of the PACS. But equally importantly, this must be kept in
mind while using financial data for the CCS as a system because a large
proportion of the outstanding of the higher tiers is tied up in the successive
lower tiers.
3.15 All this highlights the considerable
diversity in the density, scale and structure of the CCS, as well as the nature
and severity of their problems across
the country. This diversity must be recognised in implementing the
recommendations of the Task Force. The recommendations too must allow for
sufficient flexibility, to adapt to varying levels and patterns of the system
and its problems in different regions.
Role of Cooperatives in Providing
Agricultural Credit
3.16 The main players in the field of
agricultural credit in the formal sector include the commercial banks, the regional
rural banks (RRBs), and the rural cooperatives. The rural credit
cooperatives in the country are in an
impaired state. Several factors have led to the impairment of the Cooperative
Credit Structure, but it would be advisable to understand the magnitude of the
problem first. The cooperatives once dominated the rural credit market in the
institutional segment (with a share of around 65 per cent, going by the All
India Debt and Investment Survey 1991), but now have a significantly smaller
role.
3.17 Data for the past decade indicates a
fall in the share of cooperatives in the rural credit market, from around 62
per cent in 1992-93 to about 34 per cent in 2002-2003 inspite of an increase of
just under 10% per annum in the absolute disbursement on a compounded annual
basis. The shares of different institutional sectors in providing credit to the
rural areas are shown in the table below.
Rs. crore
|
Agency |
1992-93 |
1997-98 |
2000-01 |
2001-02 |
2002-03 |
|
|
Coop Banks |
9,378 |
13975 |
20,718 |
23,524 |
23,636 |
|
|
Percentage share |
62% |
44% |
39% |
38% |
34% |
|
|
Regional Rural Banks |
831 |
2040 |
4,219 |
4,854 |
6,070 |
|
|
Percentage share |
5% |
6% |
8% |
8% |
9% |
|
|
Commercial Banks |
4,960 |
15831 |
27,807 |
33,587 |
39,774 |
|
|
Percentage share |
33% |
50% |
53% |
54% |
57% |
|
Source: NABARD
Two trends emerge from the overall flow of credit to agriculture from the commercial banking sector. The number of rural branches of commercial banks has gone down marginally as part of the branch rationalisation programme. The second trend is that even though the commercial banks almost meet their targets for lending to the priority sector, they have moved more towards larger customers. The average size of direct loans to agriculture in the portfolio of the commercial banks was Rs. 13,500 in 1997, and is Rs 31,5851 now. The average size of loans of the PACS, in comparison, is currently only Rs 6,6402 per borrower, according to the data tabulated below.
Amount in Rupees
|
Particulars |
No. of
Accounts |
Loan
Amount Outstanding |
Average
loan size |
|
Public Sector Banks (PSBs) |
164 lakh |
51,799
crore |
31,585 |
|
PACS |
639 lakh |
42,411
crore |
6,637 |
Source:
PSBs - Report of Trend and Progress of Banking, RBI
PACS- NAFSCOB. Total no. of borrowers
assumed to be total no. of accounts
3.18 Thus, in a country predominated by
small or marginal land holdings, the reach of the cooperative system is much
deeper than the other institutional arrangements in the rural areas.
3.19 Notwithstanding the falling share of
cooperatives in the overall share of institutional credit practically in all
States, it was found that in States like
3.20 The traditional banking system, the
systems and procedures of which are actually designed for the urban industrial
and business financing, has limitations in reaching out to the last mile. The
exposures of the banks for this segment have risen, but, the rates for defaults
in repayment have also gone up. Most often, this happened because banks have
not applied appropriate methods for banking with the poor, by keeping in touch
with the customers and applying social collaterals. Banks have traditionally
worked on documentation related appraisals, rather than on trust and production
related appraisals. The client group, however, needs much more support than
what the banks currently provide. By
implication, we need to necessarily look to the cooperative sector for delivering credit to small and
marginal farmers, and those who have little or no productive assets. It is,
therefore, imperative that the cooperative sector, particularly at the primary
level, be revived on a priority basis.
Nature, Extent and Causes of Impairment
of the CCS
3.21 World over, cooperative credit structures
have been based on the concept of mutuality, with thrift and credit functions
going hand in hand. But, in
3.22 The impairment in governance is deep and is represented by the composition of the boards of directors of the cooperatives and the reporting systems. Because of the structural ordering, the lower tiers are managed by the higher tiers in varying degrees of detail in different States. In almost all States, the function of conducting elections for the cooperative structure is vested with the State Government. Similarly, the function of auditing is also vested with a State-run audit system. By implication, the cooperatives lose their right to self-governance and have to look up to the State constantly for several of the functions that naturally fall in the domain of the general body and the Board of Directors. Some pointers on the governance systems are highlighted below:
• No elections have been held in the CCS units across all tiers for long (10 years or more) in three States
• Boards of
nine out of 30 SCBs and 134 out of 368 DCCBs have been superseded
•
• The Department headed by the Registrar of Societies (RCS) can and does, influence
administrative matters. The interference is in the form of supersession of
Boards (please see Annexure VI for details on grounds for supersession of
Boards), appointment of administrators and assuming powers to approve staffing
patterns, recruitment, emoluments, asset purchase pattern etc.
• The
Department also interferes in financial matters in various forms, like
direction on interest rates, interference in loan decisions, announcement of
waivers, and direct or indirect pressure on
non- recovery of loans (State wise details of such interference is given
in Annexure VII)
• The
impairment of the governance structure is also because of politicisation of
these institutions, reflected in the fact that directors on Boards of
Cooperative Banks are involved in active politics either at the State,
District, and Taluka level (Annexure VI)
• Audit is
pending in at least 15 per cent of the PACS for more than a year. This is a optimistic estimate. Audits are more regular in the upper tiers.
Apart from delays, the quality of audit needs to be examined carefully. As the
State machinery is involved in conducting audits, those actually conducting
audits may not be professionally trained to audit financial cooperatives. It is
therefore, doubtful that they are able to understand and comment on the
reporting of the actual financial position of PACS.
• Audit at the
higher tiers are done in a relatively efficient manner, the income recognition
and provisioning norms are more standardized and therefore, the accounting data
from the higher tiers could be assumed to be relatively more reliable.
Nevertheless, the audit classification of some banks in some States seems to
suggest that the audited results do not depict a true and fair position of the
banks concerned.
3.23 While there are issues of internal
governance that are a cause of concern, we also have to remember that even the
external regulation and supervision for the
structure are not as stringent as it is for the commercial banking
structure. In particular the following aspects are to be considered:
• Primary
agricultural societies (PACS) are
excluded from the scope of the BR Act,1949
• The minimum
capital requirement is only Rs 1 lakh for
banks
• The cash
reserve ratio (CRR) requirements are lower than that for commercial banks
• The Capital at Risk Weighted Asset Ratio (CRAR) norms
have not been prescribed even for SCBs
and DCCBs
• All CCS
units are, however, subject to submission of regular returns on their financial
status and operations, the compliance of which is weak
• The
cooperative banks are open to periodic inspection by NABARD. The compliance
with the supervision findings and regulations is, however, weak.
3.24 The central regulatory authority
(the RBI) is naturally concerned at its inability to ensure that financial institutions comply with even the
relatively diluted prudential norms applicable to them and to enforce punitive
measures against banks that are in poor
and deteriorating financial health. The RBI’s plight may be attributed to three
primary reasons, of which dual control of cooperative banks by the RBI and the
State Governments, is one. The ambiguities on the precise jurisdiction of
powers between the two, and the reluctance of the State Governments to enforce
disciplinary sanctions by the RBI, are others. Attempts to change the law
(through the Banking Regulation Amendment bill) have failed.
3.25 The States (and in some cases the
Union Government) have not helped the regulatory authority. On the contrary,
their actions (e.g., waiver of loans in 1989 by the Union Government, periodic
waivers of interest and principal by the State Governments, delay in payments
by the State Governments on promises made, their formal or informal
instructions to delay or dilute loan recovery, and their unwillingness to
facilitate recoveries under the Revenue Recovery Act) have contributed to an
atmosphere, that encourages defaults in payment and worse.
Impairment in Management
3.26 The impairment in the management of
the rural cooperatives is a direct result of the impairment in governance. The
various forms of interference of State Governments include deputation of
officials to top positions in many banks, setting up common cadres for senior
positions in cooperatives across tiers, determination of staffing pattern, and
interference in the operational decisions of the cooperatives. The Task Force
has sought to collect information on areas in which the state governments are
involved in the operational aspects of cooperative banks. The details that the
Task Force has been able to collect from the Regional Offices of NABARD in the
matter are indicated in Annexures VI and VII.
3.27 The impairment in management is also
owing to the following additional factors:
• Managers of
PACS in several States are drawn from a common staff pool who do not feel
accountable to the PACS. Remuneration often is without reference to business
level or results.
• A generally
ageing staff profile characterised by inadequate professional qualifications
and low levels of training. (Annexure
VI).
• Delineation
of Governance and management functions are unclear and the boards take up
issues at operational level, thereby losing sight of the long term strategic
issues
• Poor
housekeeping, weak internal controls and systems.
3.28 The cumulative result is that
members, who are mostly borrowers, have little or no sense of stake in the
cooperatives, or any accountability in ensuring prudent management of funds. On
the contrary, government policies (loan and interest waivers, delaying
recoveries, the fact that loans carry State guarantees) encourage them to
presume that they can with impunity, delay or even fail to meet their repayment
obligations. Boards of management and their functionaries are not held
accountable for laxity in granting and monitoring loans, poor quality of loan
portfolios, high default rates and non performing assets (NPAs) and their
adverse effects on the financial health and viability of the societies.
Financial Performance
3.29 Data on the proportion of societies in
different tiers that reported making profits during 2000-2001 and 2002-2003,
the numbers that reported zero or negative net worth and the magnitude of
reported accumulated losses are shown in the following table :
|
Tier |
|
2000-01 |
2001-02 |
2002-03 |
|
No of SCBs |
|
29 |
30 |
30 |
|
|
No. in
Profits |
24 |
24 |
25 |
|
No. in
Losses |
5 |
6 |
5 |
|
|
No.
that have eroded net worth |
6 |
9 |
8 |
|
|
Total Accumulated losses
(Rs. Crore) |
492 |
567 |
281 |
|
|
No
of DCCBS |
|
367 |
368 |
367 |
|
|
No. in
Profits |
247 |
243 |
237 |
|
No. in
Losses |
120 |
125 |
130 |
|
|
No.
that have eroded net worth |
139 |
139 |
144 |
|
|
Total Accumulated losses
(Rs. Crore) |
3,177 |
3,770 |
4,401 |
|
|
PACS 3 (Total
number approximately one lakh) |
No. in
Profits |
46,807 |
45,292 |
58,683 |
|
No. in
Losses |
41,991 |
43,511 |
53,626 |
|
|
Total
Accumulated losses (Rs. Crore) |
2,112 |
NA |
4,595 |
Source: For SCB and DCCB: NABARD, For PACS: NAFSCOB
State-wise
details of PACS reporting profit for the years 2001-2002 and 2002-2003 are
given in Annexure VIII
3.30 Based on available data, while the
large majority of SCBs were reporting profits during this period, more than 35
per cent of DCCBs and more than half the PACS were reporting losses. About one
in five SCBs and almost 38 per cent of the DCCBs have eroded their net worth.
Accumulated losses of DCCBs amounted to around Rs 3,200 crore in 2000-2001 and
increased to Rs 4,400 crore two years later. Accumulated losses of PACS exceed
that of DCCBs.
3.31 Considering that the upper tier
cooperatives largely depend on the primaries for their business, it can be said
that the structure stands on very weak
foundations. It is also evident from the above that data, that current profits
or losses could be misleading, especially since some of the institutions that
are making current profits could have heavy accumulated losses and that all of
them may not have made the required provisions against their NPAs. Statistics
on cooperative banks that do not comply with Section 11 of the Banking
Regulation Act is also given and we find that some of these institutions may
have current profits, but accumulated
losses.
3.32 In 2002-2003, for instance, eight
out of the 30 SCBs and 144 out of 367 DCCBs are not compliant with Section 11
of the Banking Regulation Act, which means that they have completely eroded
their net worth. The amount of deposits eroded (over and above the net worth
erosion) at the DCCB and the SCB level in loss making banks is also
significant. The erosion of deposits was at Rs 3,100 crore at the level of
DCCBs and Rs 142 crore at the level of SCBs. The data relating to the erosion
of deposits in PACS is, however, not available.
3.33 The performance of these
institutions vary across States and across regions. While the number of loss
making DCCBs far outnumber the profit making ones in the eastern region, the
performance in the northern region seems to be much better. In southern and western
3.34 The reason for the losses can be
traced mainly to the overall business levels and poor recovery position of each
of the tiers. As is evident, the recovery percentages for the system as a whole
have been low continuously, making the system unsustainable without external
injection of resources.
Recovery and NPA
Percentages of the co-operative system
|
Tier |
2000-01 |
2001-02 |
2002-03 |
|
|
SCBs |
Recovery % |
82 |
82 |
79 |
|
NPA % |
13 |
13 |
18 |
|
|
DCCBs |
Recovery % |
67 |
66 |
61 |
|
|
NPA % |
28 |
22 |
20 |
|
PACS |
Recovery % |
65 |
67 |
62 |
|
NPA |
No NPA Norms have been specified for PACS |
|||
Source: SCB and DCCBs-NABARD, PACS –NAFSCOB
3.35 While the recovery and NPA positions
indicate the extent of reported impairment in the upper tiers, the figures at the
primary level have to be viewed with caution, as there are no standard
practices in respect of financial reporting. The picture presented in the table
above, therefore, may seem more optimistic than the reality. Recovery is a hard number, provisioning is to
account for likely losses on account of an assessment of impairment.
3.36 There is considerable variation in
performance within each tier and also across States (Annexures XI, XII, XIII).
3.37 Low recovery of loans obviously
affects the profitability of the institutions. Poor loan recovery has resulted
in a peculiar phenomenon, often referred to as “imbalances”. Imbalances are the
differences between the amounts showing as outstanding from a borrower in the
books of a higher tier entity (a DCCB) and the amounts shown as being repayable in the books of the
borrowing entity ( say the PACS). The imbalance occurs when the PACS receives
interest and repayment from a sub-set of its customers and pays in the amount
towards its borrowing from the DCCB.
3.38 When
the amount is paid to the DCCB, the total amount is applied first by the DCCB
to the total interest due. The residual amount then is applied to the
principal. Imbalances also occur when the PACS collects the loans and uses the
cash to fund its overheads over and above the actual interest spread available
to it. These two factors and in some situations actual defalcation result in a
curious situation, where the principal amount due to the PACS at the ground
level is smaller than the principal amount to be paid by the PACS to the DCCB.
While this syndrome has been described in some circles as an accounting issue,
it is important to recognise the larger cause, which is actually poor loan
recovery or high overheads or frauds.
3.39 Considering that there has been
widespread discussion on imbalances within the cooperative credit system, one
would expect the recovery position of the higher tier to be lower than that of
the lower tiers if the portfolios of both the tiers were perfectly aligned.
However, the data given in the above table indicates the contrary. The superior
performance of the upper tiers of the system may be because of diversification
in their business, and better performance of the non-agricultural portfolio due
to non-recognition of losses on portfolio guaranteed by the State Government or
due to repayments out of growing deposits. This diversification of portfolio is
also reflected in the exposure to agriculture and other sectors as given in the
table below. While diversifying the portfolio
has its own advantages in risk management, it also has the potential danger of
the institutions suffering a strategic drift.
These indications prompt the Task Force to focus the efforts of the
rehabilitation package on the primary level, where the exposure to agriculture
is the maximum.
(Rs. Crore)
|
Tier |
Agriculture loans |
Non-Agri. loans |
Other Loans |
Total |
Agri as a % of total |
|
SCBs |
12,488 |
16,366 |
6,198 |
35,052 |
36 |
|
DCCBs |
30,951 |
21,931 |
9,516 |
62,398 |
49 |
|
PACS |
23,153 |
7,668 |
11,591 |
42,412 |
55 |
3.40 The data on costs and margins of the
SCBs and DCCBs during the period 2000-2001 to 2002-2003 is given below.
Costs and Margins of SCBs and DCCBs
Figures in percentages
|
Particulars |
SCBs (all |
DCCBs (all |
||||
|
|
2000-01 |
2001-02 |
2002-03 |
2000-01 |
2001-02 |
2002-03 |
|
Yield on Assets |
9.38 |
8.88 |
8.67 |
10.13 |
9.86 |
9.16 |
|
Cost of funds |
6.88 |
7.19 |
6.26 |
7.09 |
6.97 |
6.32 |
|
Financial Margin |
2.50 |
1.69 |
2.41 |
3.04 |
2.89 |
2.84 |
|
Transaction costs |
1.36 |
1.38 |
1.46 |
2.04 |
1.92 |
1.72 |
|
Risk Costs |
1.25 |
1.90 |
1.42 |
1.89 |
1.65 |
1.73 |
|
Net Margin |
0.09 |
(0.52) |
0.04 |
0.15 |
0.27 |
(0.01) |
Source: NABARD
3.41 The cost of funds refers to the average
cost from all sources, deposits, borrowings and refinance from NABARD. Deposits
account for a relatively small proportion of the PACS’ funds, most of which is
from refinance through the higher tier institutions. The DCCBs depend largely
on public deposits and have for long been offering higher interest rates than
other institutions, as a means of attracting deposits. This is done partly with
the encouragement and approval of the State Governments. The “captive deposits”
syndrome, which requires the lower tier to compulsorily place a part of its
deposits with the higher tier, puts pressure on the system as a whole, to fix a
higher rate of interest.
3.42 While the financial margins of the
system seem reasonable, the system gets impaired partly because of high
transaction costs and high risk cost. High transaction costs are because of
lack of standardized business model irrespective of business volume,
overstaffing in some cases and not linking salaries with business levels in
others. High risk costs are because of low recovery levels. To compound the
problem, cooperatives do not have adequate risk mitigation systems and
procedures. Implementing Asset Liability Management (ALM), managing interest
rates on deposits and loans, appropriate credit appraisal and monitoring are
done more as an exception than as normal practice.
3.43 Inspite of interest rates having
been ‘deregulated’, lending rates are subject to limits set by the State
Government. Lack of scope for cross subsidisation compounds the problem. At the
higher tiers, there has been over-exposure to certain sectors of agriculture,
which increases the covariance risks. Sugar, cotton and tea, for instance, are
sectors where the primaries have an exposure at the farm level and the DCCBs
and SCBs have an exposure at the processing unit level.
3.44 The loan portfolios of the system as
a whole are thus, prone to greater risk and, therefore, required provisions for
risk costs are also relatively high. Because of these factors, the net margin
is extremely low and in many cases negative. Costs and Margins available to
DCCBs in select States are presented in Annexure X. Annexures XI to XIII
provide some idea of the range of variations in gross and net margins among
DCCBs across States.
3.45 Lending rates of PACS are also
subject to state set ceilings and are set well below the market rate, despite
higher risks. Transaction costs are also high (again owing to business model
issues, overstaffing and salaries unrelated to the magnitude of business).
There is considerable doubt whether PACS have to (as per state set rules) or
do, follow well-defined norms for risk provisioning. It is impossible to judge
the extent of actual provisioning from available accounts. A perusal of
accounts for PACS in a few selected districts, and in the opinion of officials
with first hand knowledge of ground reality, suggests that they generally do
not make any provision at all, or do not make adequate provisions for risks.
3.46 Other relevant data on business
parameters / infrastructure at the level of PACS and DCCBs are indicated in
Annexures XIV to XIX.
Concerns arising out of Financial
Impairment
3.47 Rural credit institutions mobilise a
large amount of deposits, nearly Rs 1,30,000 crore in gross terms, of which Rs
73,512 crore (56 per cent) are from the public. A large proportion of the
deposits are collected from individual depositors. The break up of the source
wise deposits is given below:
Source wise
deposit outstanding as on
(Rs. crore)
|
Tier |
Cooperatives |
Individuals |
Local Bodies |
Others |
Total |
|
SCBs |
29,402 |
6,995 |
1,246 |
1,469 |
39,112 |
|
Percentage |
75 |
18 |
3 |
4 |
100 |
|
DCCBs |
27,086 |
40,710 |
3,020 |
1,578 |
72,394 |
|
Percentage |
38 |
56 |
4 |
2 |
100 |
|
PACS |
|
19,120 |
|
|
19,120 |
Source: NAFSCOB
3.48 As seen above, 38 per cent of the
deposits of DCCBs are from cooperatives, including PACS. As statutory liquidity
ratio (SLR) requirements of urban cooperative banks and other banking
institutions in the area can be placed in the DCCB (and in turn DCCBs place
their SLR deposits in SCBs), the deposits under the head “cooperatives ” may
have a significant component of SLR related deposits. This adds to the overall
risks to the cooperative banking sector, taking it much beyond the exposure of
individual deposits in the district and state level banks. Erosion of deposits
in the higher tiers, therefore, could have a “domino” effect on the banking
system in the area.
3.49 To protect the interests of depositors,
DCCBs and SCBs are subject to controls under the Banking Regulation Act. They
are required to observe prescribed prudential norms and their individual
depositors also have insurance cover up to Rs 1 lakh by the Deposit Insurance
and Credit Guarantee Corporation of India (DICGC). It is evident, however, that
the insurance coverage provided is limited, as institutional deposits with the
upper tiers do not get covered by the DICGC, thus placing the individual
depositors of the lower tier institutions at risk, as several banks have had
significant erosion of deposits. This certainly is an area of concern.
3.50 It is also important to note that
deposits at the level of PACS are not covered by the DICGC. This is a matter of
serious concern. While deposits of individuals at the level of the PACS is not
uniformly high, some states like Kerala, Tamil Nadu and Orissa together account
for around 70 per cent of the outstanding deposits of PACS in the country. Some
states (like Kerala and Tamil Nadu) have introduced their own insurance
mechanisms to give limited protection to PACS depositors. These schemes have,
however, remained notional as depositors in neither State have received actual
protection.
Remedial Measures and Approach to
Reform
3.51 Obviously, unless the causes of the
serious and growing impairment in several dimensions are tackled, cooperatives
cannot be expected to arrest their declining role in providing agricultural
credit, let alone play a significant role in achieving the targeted rapid
expansion of credit to the farm sector. As noted earlier, several committees
and concerned cooperators have suggested measures to revive and revitalise the CCS, so that cooperatives become an
effective medium for meeting the savings and credit needs of small and marginal
farmers, rural artisans and other under-privileged sections of rural society.
3.52 Reviving and revitalising the CCS is
essential, both on functional and ideological grounds. In functional terms,
cooperatives already have a wider and deeper reach in the countryside than
other financial institutions. Experience has shown that the latter serve mostly
the better -off segments of borrowers, that have a sufficiently large asset
base. They are reluctant to cater to the small and marginal farmers and other
underprivileged sections, on grounds that lending to them is far too costly and
risky to be profitable.
3.53 Cooperatives, of the mutual thrift
and credit type, are the only form of organisation by which economically
disadvantaged individuals and groups could, through voluntary collective
action, overcome their disadvantageous position in an unequal market and
promote their well being. Organisations, in which members know each other first
hand, are closely linked through kinship and other social relations, and have a
strong mutual stake in proper use of the common credit pool, credit would be
put to good use. Costs of administration and risks of default in repayment
could be reduced. No less relevant is the moral appeal of cooperatives as a counter
and an alternative to individual or corporate enterprise, for mobilising and
using economic resources for owners’ profit.
3.54 Recognising the important role that
the cooperative network can play in delivering credit to sections of the rural
population, which cannot, or are unlikely, to be reached through commercial and
rural banks, all the earlier-mentioned committees are unanimous on the steps
needed to realise their potential. They emphasise the need to (a) restore
democratic management in the societies by holding free and fair elections
regularly, (b) reduce the scope for government interference in their management
to a minimum; (c) rationalise staff and improve their professional ability; and
(d) create a climate conducive to prudent management of resources and efficient
management and recovery of dues. Some suggest de-layering of the cooperative
structure, increasing the service area of primary cooperatives to make them viable, and even making DCCBs and
PACS branches of the SCBs.
3.55 Practically all reviews have
recommended strongly against waivers of interest and loan repayment by
governments, restraining or impeding recovery processes and such other
measures, that create strong
disincentives to borrowers to settle their dues fully and promptly. They have
also been unanimous in recommending abolition of “dual” control in matters of
financial regulation of cooperative banks and vesting the needed authority and
responsibility fully and wholly with the central regulatory authority, the RBI,
under the Banking Regulation Act.
3.56 Both the Capoor and the Vikhe Patil
Committees recommended special financial assistance to help viable and
potentially viable DCCBs and SCBs to wipe out accumulated losses, strengthen
their capital base, consolidate their outstanding debt from past borrowings and
convert them into medium term loans at lower rates of interest. They have
further recommended that the cost of financial restructuring (running into
thousands of crores of Rupees) should be shared by the
3.57 Having perused the reports of
earlier committees, the Task Force agrees with their central approach and
thrust that the cooperative credit structure (CCS) needs:
• Special
financial assistance to wipe out accumulated losses and strengthen its capital base
• Institutional restructuring to make for democratic, member driven, autonomous and self-reliant institutions
• Radical
changes in the legal framework to empower the RBI to take action directly in
matters and to the extent deemed appropriate for prudent financial management
of banks, and
• Qualitative
improvement in personnel in all tiers and at all levels through capacity
building and other interventions, leading to an increase in overall efficiency.
3.58 Our recommendations on the specific
measures in each of these spheres are detailed in subsequent chapters. They
should be viewed as an inter-related, integrated package, to be calibrated by
time and institutional responsibility.
The package needs to be implemented in a way that it may have a
synergetic impact in improving the health and vitality of the cooperative
credit structures. Any propensity to pick and choose its recommendations cannot
but destroy the “warp and woof” of the fabric, that constitutes its core.
Unless the conditionalities prescribed go hand in hand with the resource
support, the ailments characterising the cooperatives will not be addressed, and the money
invested will go down the drain. If the assignment given to the Task Force is
not to be repeated by another committee in the future, it is necessary that the
package prescribed by it be accepted in full. Such an approach will have the
best chance of being accepted by the stakeholders as the basis for reform and
revival.
General
Approach and Financial Restructuring
Guiding
Principles
4.01 The Task Force is of the view that financial restructuring of the cooperative credit structure (CCS) must follow some basic principles, enumerated below.
● Re-engineering, including financial re-engineering, must cover all the tiers of the cooperative credit structure. In the opinion of the Task Force, a superstructure can only be as strong as the base. Recapitalisation and restructuring the intermediate and upper tiers of the cooperative credit structure, without addressing the infirmities at the primary level, would defeat the objectives of reviving and revitalizing the CCS. Primary agricultural cooperative societies (PACS) are the foundation of the short-term cooperative credit structure and much of the weakness of the upper tiers is because of their poor financial health and deficiencies in the way they are organized and managed.
● The
Revival Package (RP), therefore, must include assistance for restoring the PACS
to acceptable levels of financial health. It must put in position an
environment and specific measures that could enable the PACS to evolve into
democratic, self-governing and financially well managed institutions.
● It has
been brought to the notice of the Task Force that such an exercise could be
difficult because the number of credit cooperatives at the base level is very
large. To overcome this difficulty, the Task Force has suggested some simple
criteria for identifying eligible institutions, sharing patterns, etc.
● Recapitalisation
must cover the aggregate erosion of capital in all the tiers of the CCS. It was
pointed out to the Task Force that financial constraints pose a case for
partial recapitalisation, limited to losses arising out of agricultural lending
alone. The Task Force is not in
agreement with this line of reasoning, as it believes that partial
recapitalisation, like under-financing projects, have the potential to place
the entire resource support at risk.
● The Task Force is not advocating an
open-ended recapitalisation of all credit cooperatives, however. It is
conscious that the resource support in the way of recapitalisation, is
ultimately a charge on public funds and therefore, must be recommended with
utmost caution. Keeping this in view, the Task Force recommends that
recapitalisation be limited to institutions that conform to the standards of
eligibility prescribed by it (and enumerated later in this chapter). At the
same time, it also recommends the future setup of the remaining non-viable,
dormant and defunct credit cooperatives or banks, by way of mergers,
amalgamations or closure. The Task Force suggests transitional arrangements to
ensure flow of credit in the areas of operation of such societies.
● Adhering to the principle that a behavioural shift cannot occur without a strong incentive, the Revival Package combines a generous and comprehensive capitalisation package, with a stringent set of conditionalities for legal and institutional reforms. The Task Force thus, allows options to State governments and the CCS to accommodate ground level diversities in implementing the Revival Package in a phased, but time-bound manner.
4.02 The major issues taken into consideration in
working out the details of financial reconstruction include:
a) criteria for determining eligible purposes
and institutions,
b) the quantum of assistance required,
c) the sharing pattern,
d) conditionalities and
(e) timeframe.
Eligible Purposes
4.03 The Task Force is of the opinion that
resource support for financial restructuring must enable eligible institutions
to clear accumulated losses, maintain minimum capital and retire equity
contributions by State Governments. The resource support should also cover the
costs of technical assistance to upgrade human resources and management
systems, as well as the costs of implementing the package.
4.04 The accumulated losses of various units of
the CCS arise from several sources, enlisted below:
• Non-repayment of loans given to members for agricultural and non-agricultural businesses and the resulting ‘imbalances’
• Non-repayment
of loans given to members for other purposes and the resulting ‘imbalances’
• Losses on
account of non-credit businesses of CCS units (like the Public Distribution System
(PDS), and procuring and supplying agricultural inputs)
• Non-repayment
of direct loans under State Government guarantees and where the State has
failed to honour the guarantee after the loans have been defaulted
• Non-repayment
of other direct loans without any guarantee from a State Government or any other, and
• Failure of
State Governments to release funds to cover waivers of loans and interest,
interest subsidies and other subsidies announced by them periodically
4.05 Accumulated losses as shown in the balance
sheets of the CCS units do not reflect or take into account amounts not
received from State Governments as invoked guarantees or other dues. “Dues
receivables from the State Government” are shown without making any further
provisions.
4.06 The Task Force recommends that such losses be
provided for within the financial package for the CCS. The Task Force
considered and rejected the possibility that the assistance be restricted to
losses arising out of agricultural loans only, as it would tantamount to
partial recapitalisation. For the same reason, the Task Force does not agree
with the suggestion that accumulated losses arising out of non-financial
businesses need not be covered by the package.
4.07 The Task Force recognises that along with
well documented reasons, like poor appraisal, ineffective follow-up, etc.,
losses can also be traced to disproportionately high management and
administrative overheads. The losses of the CCS units can also be traced to
high cost of funds, arising from the captive deposit syndrome, entailing
untenable interest rates on deposits and loans, defalcations, etc. The solution to these problems lies in
restructuring governance and in measures to improve the efficiency of
managements.
4.08 The measures needed to improve the governance
and efficiency of the CCS are detailed elsewhere in this report, with the
recommendation that the cost involved be borne out of the financial package.
The Task Force would like to emphasise that its recommendation that the accumulated
losses of the CCS units be covered by the Financial Package does not tantamount
to writing off their defaulted loans. The taskforce would expect the CCS units
to take every possible step in future, including recourse to legal action, to
recover their loans subsequently. It also expects the State machinery to assist
the process to the extent necessary. The Task Force also recommends that
wherever defalcations have come to light, stringent action be taken against
those involved.
4.09 While discussing the modalities for
determining the extent of accumulated losses, the Task Force took note of the
fact that the quality of housekeeping at the primary level has serious
shortcomings. The Task Force also observed that in a number of States, no
standardised norms and procedures exist at the primary level for making
provisions for losses. This being the case, estimates of institution-wise
accumulated losses on the basis of the extant, and in many cases outdated,
financial statements put out by the primary level institutions could lead to
serious distortions in the assessment of the accumulated losses at that level.
The accumulated losses of the CCS units, therefore, must be estimated afresh
and in a transparent manner.
4.10 The fresh appraisal of losses will require
estimating accumulated losses in keeping with uniform NPA (non performing
assets) norms, and to have the accounts of all societies in all states audited
for the latest year on that basis. The Task Force took into account the
argument that this process would be time-consuming at the level of PACS
(primary agricultural cooperative societies), if done through the existing
institutional structures. Recognising
the merit of this argument and the need to expedite the process, it is
recommended that the task be entrusted to specially designated auditors, under
a fee-based arrangement. The Task Force feels that the true and fair picture of
the institution-wise accumulated losses at all levels will then emerge.
Capital to Risk weighted Asset Ratio
(CRAR)
4.11 The Task Force notes that under the existing
arrangement, cooperative credit institutions including cooperative banks are
outside the CRAR framework, on the ground that there is an in-built accretion
to capital every time a loan is availed of by a member. The Task Force feels that in view of the huge
rates of default characterising the CCS, there is a need to bring all tiers of
the CCS under the CRAR framework. The Task Force notes that under the present
regulatory framework, commercial banks are required to maintain a minimum CRAR
at 9%.
4.12 The Task Force recognises that credit
cooperatives (including cooperative banks) operate in defined geographical
areas, with credit portfolios concentrated in a single sector, subject to the
risk of higher concentration. It feels that there is a case for factoring in
the pressure exerted by the higher covariance risk inherent in such an
arrangement. The Task Force, therefore, recommends that all CCS units, viz.,
PACS (primary agricultural cooperative societies), DCCBs (Central Cooperative
Banks at the District Level), and SCBs (apex Cooperative Banks at the State
Level), be initially supported with external resources, wherever needed, to
achieve a minimum CRAR of 7%.
4.13 The CRAR may increase further through internal
accretions within three years from the date of capitalization to 9%, and
further to 12% in the next two years. The Task Force further recommends, with a
view to protecting the resources being made available to the CCS, that under
the Revival Package, a review be carried out by the RBI (the Reserve Bank of
India) to determine whether a case exists for a higher level of CRAR.
4.14 Looking back in history, the Task Force
cannot but agree with Lord Tennyson that “the old order changeth yielding place
to the new, lest one good custom should corrupt the world”. State partnership
was introduced by the All India Rural Credit Survey (1954) to enhance the
borrowing powers of cooperatives by increasing their capital base. This initiative has, over time, been the
single most important cause for bureaucratisation of the system and for the
intrusive and pervasive control by the State Governments over all aspects of
cooperative functioning.
4.15 The
Task Force is of the view that the time is now opportune to reverse the course
of history. Initially, loans were made available to State Governments to
contribute to the share capital of cooperatives. The time has now come for cooperative credit
institutions to return the equity received by them from the State Governments
over time. To facilitate this process, which incidentally, constitutes an
important cornerstone of its recommendations, the Task Force recommends that
soft loan support be provided to institutions that do not have the wherewithal
to return State Government equity. The
Task Force believes that this will pave the way for cooperatives to return to
their original mandate of member-driven and member centric institutions.
4.16 Elsewhere in this report, the various forms
of impairment endemic to the CCS have been indicated. The need to design
specific financial proformae for working out accumulated losses and to be able
to confirm these losses through specially commissioned audits, has also been
highlighted. The Task Force is of the view that special audits will enable
true and fair assessment of the financial assistance to be provided to
the CCS, but would not be able to ensure that the CCS remain on the same
trajectory on a continuing basis.
4.17 Various other measures are required to inject
method in the CCS accounting system, like developing and implementing a
software-based common accounting system, dovetailed into an appropriate MIS (management
information system), to facilitate proper and timely decisions at all levels.
The system would also require appropriate hardware support. During its
discussions, the Task Force was of the unanimous view that provision for
hardware needs to be consistent with the requirements of cooperatives at rural
centres. Members felt that providing sophisticated equipment at centres where
requirements could be met with simpler hardware options, would be a waste of
money.
4.18 The Task Force also discussed at length, the
issue of training and capacity building in cooperatives. It was felt that the
training available in the system had largely ignored credit cooperatives at the
ground level. Most of the training has
traditionally focused on officers in the intermediate and senior executive
levels of the cooperatives. The desirable training strategy would meet the
needs for training and skills development of a balanced mix of staff, elected
representatives and members.
4.19 The existing training programmes are,
moreover, archaic and outdated, focused more on issues like the history of
cooperation and legal enactments, than on matters pertaining to business and
operations. This trend too needs to be
set right. The extant training facilities are provided through various
channels, including institutions sponsored by the State Governments, CCS (which
are substantially supported by NABARD),
4.20 Taking into account, the number and range of
cooperative credit institutions in the country, there is space for all these
institutions to play a meaningful role. Having said this, the Task Force would
like to clearly state that in the light of the resource support now being
recommended by it, the nature and scope of cooperative training cannot be left
to the whims and fancies of individual institutions. There is a need to
standardize the training programmes and curricula, so that the programmes can
be replicated and implemented across the country.
4.21 To operationalise these recommendations, the
Task Force suggests that a joint group be set up under the chairmanship of
NABARD, comprising representatives of the RBI, select government sponsored
institutions and those promoted by the cooperative structure, with a mandate to
finalise the training strategy by the end of
June 2005.
Eligible Institutions
4.22 Having determined the purposes qualifying for
resource support, the Task Force now discusses the methodology for identifying
institutions eligible for it. It was argued that all units of the cooperative
credit structure (CCS) must be capitalised. The Task Force is unable to accept
this line of reasoning, because even preliminary data clearly indicate the existence
of cooperatives at different levels, whose performance is so poor that no
amount of capitalisation can address their basic infirmities.
4.23 The Task Force is inexorably led to the
conclusion that capitalisation must first be conditional to a rigorous
classification of the CCS into institutions which deserve capital support and
those that do not. Having said this, the Task Force would like to draw
attention to the fact that the CCS in
4.24 The criteria for classifying ground level
institutions in the past were business size, availability of paid Secretary,
own premises, etc. While these criteria do indicate certain information about
the institutions concerned, they are not suitable for assessing financial viability, which is at the heart of
the present exercise . The Task Force is of the view that in principle, the
eligibility of institutions should be determined on the basis of criteria which
are uncomplicated and empirically verifiable. The criteria for identifying
institutions that deserve resource support should also be able to be dovetailed
with a simple methodology, for obtaining data necessary for deciding on their
eligibility and for working out the desirable quantum of resource support.
4.25 During the discussions, it was pointed out
that the criteria for all institutions should be the same, for the purpose of
uniformity. The Task Force is, however, of the view that institutions at the
ground level, viz., PACS (primary agricultural cooperative societies) are
mainly conducting their business through borrowed funds. As a result, a
criterion which combines interest margins vis a vis operating costs and the
level of recovery would be more relevant in their case. At the same time, net
worth and erosion are more applicable to upper tier institutions, which conduct
business wholly or partly through public deposits.
4.26 It needs to be mentioned here, that
eligibility of the DCCBs (and the SCBs too) for the Revival Package, would be
determined after factoring in the impact of capitalisation of all the PACS
affiliated to them5. The chart below
indicates the criteria suggested by the Task Force for classifying institutions
in the CCS eligible for resource
support :
|
Institutions |
Criteria |
|
PACS |
1) Gross Interest Margin >= 50% of operating expenses6 and 2) Recovery >= 50% of demand |
|
DCCBs |
Positive
net worth and those with negative net worth with deposit erosion of less than
25% |
|
SCBs |
Positive net worth and those with negative net
worth with deposit erosion of less than 25% |
Quantum
of Assistance
4.27 The Task Force recommends that the actual amount
of assistance be based on audited balance sheets as at the end of March 2004.
Suitable arrangements should, therefore, be made for a special audit,
especially of PACS. The assessment in the following paragraphs is, however,
based on data available as on March 2003 and, therefore, is only indicative at
this stage.
4.28 In working out the requirements of resource
support for cooperatives, the Task Force has followed the bottom up approach.
It has first reviewed the extent of impairment at the level of the primary
societies and estimated the resources required for cleansing it. The strategy
is based on the logic that once the losses at the primary level are met, there
would be a resultant downward impact on the accumulated losses at the level of
the DCCB. The same reasoning would apply to capitalisation of DCCBs and SCBs.
4.29 The accumulated losses of PACS as at the end
of March 2003, aggregated to Rs 4,595 crore7.
The classification of these losses into those attributable to agricultural
loans, non-agricultural loans, other loans, and non-credit business, is not
available in the existing database.
4.30 A rough estimate, however, is possible at the
macro level. The losses have been classified by first arriving at the break-up
between credit and non-credit losses, on the basis of the proportion of loans
outstanding to working capital. The losses attributable to loans for
agricultural business, non-agricultural business and loans for other purposes
(like jewel loans etc.) have then been estimated on the basis of the proportion
of purpose-wise loans outstanding8.
However, to get such an exercise done at the level of each society would
involve enormous time and effort, delaying the entire re-capitalisation
process, without any significant value addition. The Task Force, therefore,
suggests that accumulated losses at the level of PACS be divided into those
arising out of credit business and non-credit business.
The estimated
magnitudes of the accumulated losses of the PACs on this basis are tabulated
below.
(Rs. Crore)
|
Total
Accumulated Losses |
4,595 |
|
Losses on account of credit business |
3,170 |
|
Losses attributed to non-credit business (e.g.,
PDS etc.) |
1,425 |
4.31 The accumulated losses of DCCBs aggregate Rs
4,401 crore as on March 20039. As
mentioned earlier, cleansing the balance sheets of PACS would automatically
reduce the accumulated losses of the DCCBs. The Task Force has, consequently
estimated the losses of the DCCBs, by setting off the credit losses of the PACS
on account of their loans for agriculture and non-agricultural business
operations (estimated at Rs. 2,31410
crore), against the accumulated losses of DCCBs. The balance of losses at the
DCCB level represents :
• residual
losses on account of loans to PACS for other purposes,
• DCCB’s lendings to societies other than
PACS
• Direct lending by DCCBs to individuals
and units for agriculture or
non- agriculture purposes
4.32 A precise estimate, however, can only be made
after the Balance Sheets are trued based on prescribed NPA norms, through
special audit by supervising officials of the NABARD.
4.33 The accumulated losses of SCBs (apex
cooperative banks at the state level) aggregate Rs 281 crore. A precise
estimate, here too, can only be made after the Balance Sheets are trued based
on prescribed NPA norms, through special audit by supervising officials of
NABARD.
4.34 The Task Force was given to understand that
as of end March 2004, State Governments had extended guarantees to the extent
of Rs 4,495 crore in favour of DCCBs and SCBs, for loans issued by them to
various agencies and units. These guarantees comprise those aggregating Rs
3,181 crore in favour of SCBs, and Rs 1,314 crore in favour of DCCBs. The Task Force noted with concern that
guarantees aggregating Rs 827 crore and Rs 337 crore had been invoked by SCBs
and DCCBs respectively, because of defaults by the borrowing agencies. These
amounts had not, however, been paid by the respective State Governments to the
concerned banks.
4.35 The Task Force would like to impress on the
State Governments that not paying funds to the SCBs and DCCBs would seriously
impact their financial viability. It, therefore, urges State Governments to pay
these monies to the respective banks immediately, with accumulated interest.
However, State Government representatives, who interfaced with the Task Force
pointed out that in most cases, the financial position of State Governments did
not enable them to meet these commitments immediately.
4.36 So that the financial position of the State
Governments does not put the recapitalisation process at risk, the Task Force
recommends resource support for them. It recommends that soft loans be made
available to the concerned State Governments on a specific application being
made to the implementing agency, as part of the MOU framework designed by the
Task Force, to enable them to pay these dues, with accumulated interest to the
CCS units concerned, as the first step towards recapitalisation.
4.37 The Task Force notes with concern the propensity of State Governments to announce loan and interest waivers and other subsidy schemes from time to time, which affect the cash flow of the lending agencies and seriously vitiate the repayment climate. The Task Force does not deem it appropriate to review the complexities of the issues involved, but from a purely financial standpoint, it has no hesitation in saying that the sooner these practices are brought to an end, the better it is for the system.
4.38 In the interest of the recapitalisation
initiative, the Task Force, albeit reluctantly, recommends that the outstanding
amount of Rs 720 crore announced by
various State Governments from time to time for such interest waiver and
subsidy schemes, be immediately paid by the State Governments, along with the
accumulated interest. Here too, however, the Task Force recommends a soft loan
support to the State Governments in the light of the state of their finances.
Once again, the soft loan will be available on a specific application to the
implementing agency within the MOU framework.
4.39 As mentioned earlier in the report, these
amounts (invoked but unpaid guarantees + other dues) are generally shown as
receivables from the Government and hence, are not reflected in the losses
shown in the balance sheets of cooperative banks.
CRAR
4.40 Earlier in the report, the Task Force noted
that cooperative credit institutions, including cooperative banks were beyond
the CRAR (capital at risk weighted asset ratio) framework. It recommended that
all CCS units, including cooperative banks, may initially be supported with
external resources. The support would be through a soft loan in the form of a
Tier II capital, wherever necessary, to achieve a CRAR of a minimum of 7%, to
be taken up by internal accretions to 9% within three years from the date of capitalisation,
and further to 12% in the next two years.
4.41 The amount required for taking the CRAR of
cooperative institutions to a minimum of 7%, can only be arrived at after the
recapitalised balance sheets are available. In the light of the fact that the
system has an inherent linking of share capital contribution to loans and that
the accumulated losses of the system would have been wiped out at the end of
the cleansing process, the amount required is not expected to be large.
4.42 As at the end of March 2003, the contribution
of State Governments to the share capital of CCS institutions aggregated Rs
1,243 crore, as shown below:
Share capital
contribution by State Governments
(Rs. crore)
Agency |
Amount |
|
PACS |
619 |
|
DCCBs |
521 |
|
SCBs |
103 |
|
TOTAL |
1,243 |
4.43 Elsewhere in the report, the Task Force has
recommended that “the time has now come for
cooperative credit institutions to return the equity received by them from the
State Governments over time. To facilitate this process, which constitutes an
important cornerstone of its recommendations, the Task Force recommends that
soft loan support be provided to institutions which do not have the wherewithal
to return State Government equity”.
4.44 The Task Force hopes that the CCS
institutions at different levels will understand the justification for and implications
of the recommendations made by it, and find the resources for returning State
Government equity. However, a sum of Rs 1,243 core has been factored in, as
part of the recapitalisation, as soft loan assistance to CCS units, just in
case they are unable to do so.
4.45 The recommendations of the Task Force for
Technical Assistance have been delineated at various places in the report. The
major components under this head, including the amounts required, are detailed
below:
(Rs.
Crore)
|
Item |
Amount |
|
46.00 |
|
o Designing of special balance sheets and training manuals, training of
trainers for the special audit |
0.50 |
|
o Training of auditors for conduct of special audit |
0.50 |
|
o
Special audit costs and vetting by CAs |
45.00 |
|
516.00 |
|
o Designing of standard common accounting system and accounting manual,
translation into local languages and printing, training of trainers |
1.00 |
|
o Designing standardised accounting software based audit and information
systems and , development of common software etc. |
215.00 |
|
o Designing of hardware configurations (Personal Computer, dot-matrix
printer, modem, networking arrangements, UPS), installation and AMC and
funding for supplying the same under a need based arrangement |
300.00 |
|
·
Human Resource Development |
108.00 |
|
o
Designing standardised training manuals, training
materials, translation and printing costs |
2.00 |
|
o
Training of Trainers |
1.00 |
|
o Conduct of Training Programmes for Board members, staff, and members
of PACS, DCCBs and SCBs |
105.00 |
|
·
TOTAL |
670.00 |
Implementation
Costs
4.46 The process of implementing the
recommendations of the Task Force was considered at length. One view was that
it could be left to the various stakeholders. Another view was to assign the
responsibility of implementing the
recommendations to various State Governments. The Task Force rejected both
these options, on the ground that there would be a serious conflict of interest
if the stakeholders were also to be the implementing agencies. To safeguard the
resources being made available, it is necessary to identify an institution at
the national level, that enjoys the confidence of stakeholders and has a track
record for impartial functioning.
4.47 The
National Bank for Agriculture and Rural Development (NABARD) is the natural
choice and may be designated to carry out this task, both as pass through and
implementing agency. Elsewhere in the report, the Task Force has made
recommendations on the responsibilities, which will devolve on NABARD. Suffice it to say at this stage, that in the
fitness of things, it would be appropriate to reimburse the institution of all
the costs involved in discharging these responsibilities.
4.48 In
addition to providing the manpower necessary for conceptualising, guiding,
handholding, monitoring and reporting on the initiative, NABARD will also
implement the entire technical assistance package in collaboration with
suitable partners. The aggregate amount estimated under this head, therefore,
has a certain overlap with technical assistance. However, bifurcating the costs on a notional
basis, the Task Force estimates a support of Rs 360 crore to NABARD over a five
year period.
Overall magnitude of the Financial
Package
4.49 On the basis of the data as on
Sharing of Liability and Financing
4.50 Having arrived at the aggregate amount
involved in the Revival Package, the Task Force turned to the question of
sharing the liability. The Task Force is clear in its perception that
theoretically recapitalisation is the responsibility of the owners; who in this
case are the members of the CCS and the State Governments concerned. The Task
Force noted that both the committees prior to it, have recommended the
involvement of the Government of India on various grounds, including the fact
that a similar exercise had been funded by it for the public sector commercial
banks (PSBs) and regional rural banks (RRBs).
4.51 The
Task Force would like to clarify that the recapitalisation of PSBs was done by
the Union government, in its capacity as the owner. In the case of the RRBs, other stakeholders
had also participated in proportion to their equity. Therefore, on the face of it, there does not
seem to be any legal ground for the participation of the Union government in
the recapitalisation process for cooperatives. However, in view of the fact
that historically the Union Government has played a significant role in the
development of cooperatives and indeed mentored them over time, a moral
responsibility also seems to be involved.
Moreover, there is indeed, an urgent need to rapidly expand agricultural
credit to boost productivity and production in the agricultural sector. Taking
these factors into account, as well as the fact that only a strong CCS can play
a major role towards this end, the Union Government needs to involve itself in
the revival of the CCS in national interest.
4.52 During discussions on the sharing pattern, it
was submitted that the simplest methodology for doing so, would be to devise a
formula based on fixed percentages as suggested by earlier Committees. Issues involved were debated and it was felt
that formula based sharing patterns tended to become points of contention
between the various stakeholders, jeopardizing the broader objective of
reviving the CCS. The Task Force was of the view that the sharing pattern,
above all, should be based on a formulation which is empirically verifiable,
transparent, and relatively simple to implement. The consensus of the Task
Force is that the sharing pattern should be based on the origin of loss, rather
than an arbitrary proportion for sharing the liability.
4.53 The two arguments made above lead to the
conclusion that in the fitness of things, losses arising out of loans for
agricultural purposes at all the levels may be fully borne by the Union
Government and an appropriate mechanism on a similar logic may be used for
losses from other loans and activities. While this method can fairly easily be
implemented at the level of DCCBs and SCBs, it has been mentioned earlier, that
determining accumulated losses arising from different types of loans issued by
PACS may be very difficult and not really commensurate with the effort involved,
as the principal credit business of PACS is agricultural loans.
4.54 Taking into account the fact that there are
almost a lakh PACS at the ground level, undertaking both credit and non-credit
businesses, the simplest empirically verifiable sharing formula between the
Union government and stakeholders, therefore, would be one, in which the former
picks up the bill for losses arising out of all the credit business of
PACS. The State Governments will have to
bear the losses on account of non-credit businesses (PDS, sale of fertilisers,
procurement, etc.), on the ground that such non-credit business is largely
driven by them.
4.55 As already mentioned, once the losses of
retail outlets have been met, the losses at the level of DCCBs from their
lendings to PACS at the ground level, would automatically stand reduced. It has already been mentioned that State
Governments would be required to pay upfront for their existing liabilities in
respect of invoked guarantees and other dues. These liabilities are not
reflected in the traditional balance sheets of the cooperative banks, as they
are merely shown as receivables from the government. The DCCBs also have losses
pertaining to loans given by them to other cooperative societies (like
marketing, handloom, consumer societies etc.), with or without government
guarantees, and their direct loans to individuals for agricultural and
non-agricultural businesses and loans for consumer goods etc.
4.56 As mentioned earlier, the accumulated losses
arising from the loans of the DCCB’s for agriculture, including their direct
loans to individuals and units other than PACS, would be borne by the
government. The
DCCBs, however, would have to bear losses arising out of any other direct loans
made by them, on the ground that all decisions pertaining to such loans have
been taken by them.
4.57 The accumulated losses from the loans of DCCBs to other cooperatives, should be shared by the State Governments as a part of these losses in proportion of (uninvoked) guaranteed loans to total outstanding loans of the same category with the Union government taking on the balance. A similar method is proposed for the accumulated losses of the SCBs.
4.58 The recommendations of The Task Force on the
sharing of the accumulated losses is not based on artificially fixed
proportions, but on the origin of such losses within a flexible matrix.
4.59 Based on the above recommendations, the
aggregate liability of the Revival Package of Rs 14,839 crore would be shared
as follows:
(Rs crore)
|
Elements |
Responsibility of |
||
|
GoI |
State Govt. |
CCS units |
|
|
Accumulated losses due to |
|
|
|
|
·
All credit business of PACS + agricultural credit business of
DCCBs/SCBs |
3,922 |
|
|
|
·
Non-agricultural credit business of DCCBs/SCBs |
841 |
93 |
401 |
|
·
Non-credit business of PACS (PDS etc.) |
|
1,425 |
|
|
·
Unpaid invoked guarantees |
|
1,164 |
|
|
·
Other receivables from state governments |
|
720 |
|
|
Return of government equity |
|
|
1,243 |
|
Minimum CRAR of 7% |
|
|
** |
|
Human resource development + special
audits |
154 |
|
|
|
Computerisation including software |
516 |
|
|
|
Implementation costs |
360 |
|
|
|
Total |
5,793 |
3,402 |
1,644 |
|
Share of liability |
53 % |
31 % |
16 % |
|
Means of Financing |
Grant by GoI |
Soft loan by GoI to state govt. if needed |
Soft loan by GoI to CCS units if needed |
|
Total |
10,839 |
|
|
|
Add Contingencies |
4,000 |
|
|
|
Grand Total |
14,839 |
|
|
** This amount
can be estimated only after recapitalised balance sheets for the CCS units are
available
4.60 The percentage shares indicated represent the aggregated approximations at the macro level. It is clarified that these percentage shares at the state level would depend on the pattern of loan portfolio and accumulated losses in each CCS unit, the extent of guarantees issued by state government and the amounts of other receivables from the state government.
Chapter-5
Institutional,
Legal and Regulatory Reforms
The need for Reforms
5.01 Financial assistance alone cannot revive
cooperatives and empower them to realise their full potential to reach adequate
credit to villages and the rural population there (especially the asset-poor,
the asset-less and the disadvantaged). Cooperatives can only be revived if they
become democratic, self-governing, self-reliant organisations for mutual thrift
and credit. The scope for the government’s involvement and interference in
their internal functioning should be eliminated. Enactment of a liberal law by
the State Governments to enable cooperatives to function as fully member driven
institutions is an essential and critical requirement.
5.02 The responsibility for using resources of
societies (made up of members’ funds and borrowings) efficiently and prudently,
must be left to democratically elected managements, accountable to members. At
present, most institutions of the Cooperative Credit Structure restrict
membership, with full voting rights to borrowers. Depositors are categorised as
nominal members without voting rights, or are not given any membership status.
This is not only inconsistent with cooperative principles and democratic
functioning. It is also logically inconsistent, as those whose money is
intermediated have no say in the management of their own money. It is,
therefore. essential that all users – depositors and borrowers – be made full
members with equal voting rights. This is also essential to strengthen the
mechanisms of internal supervision and enforcement of credit discipline.
5.03 Ideally, mutual thrift and credit societies
are supposed to operate on the principle that members should deposit their
savings with the society to be lent to members in need of credit. Failure on
the part of members to keep a close watch on the working of the society could
erode resources they have put into the society. A strong incentive exists,
therefore, for members to take an active interest in the working of their
societies. If that happened, there would be no need for external regulation of
internal management of cooperatives at the primary level.
5.04 However, the reality is that even if all
villagers were to be members and were willing to deposit their savings with the
cooperative, the magnitude of resources available may not, and in most cases
will not, be adequate to meet all the credit needs of the community. This is
all the more likely when those who have savings do not choose to be members and
even when they do, may not want to put all their savings in the society. The
cooperatives, therefore, must be free to borrow from other financial institutions,
to supplement their own resources on the basis of their credit worthiness in
the market.
5.05 The
quantum of such borrowings and the terms is best determined by the quality of
credit portfolio, financial performance and repayment record of the societies.
Direct state funding or interference in the financial management of the system,
rampant at present, is inimical to the health of the system, and must be
eliminated. Restrictions on availability of and access to NABARD refinance for
the thrift and credit societies (that have come up under the new parallel
Acts), should, also be removed. While there is no justification for external
regulation of the financial matters of such societies, it is desirable to lay
down clear norms of capital adequacy and provisioning, to ensure their good
health.
5.06 In principle, higher tier institutions (DCCBs
and SCBs) can also choose to adopt this model and accept deposits only from
members. Once they cease to have public deposits (defined as deposits by people
who have no voting rights), they need no longer be subject to licensing and
regulation under the Banking Regulation (BR) Act. As long as cooperative banks
accept public deposits, however, they should be licensed and observe prudential
norms applicable to banking institutions.
5.07 The State Governments need to make
legislative amendments to enable the Reserve Bank of India (RBI) to exercise
its regulatory powers under the BR Act directly, and not through the Registrar
of Cooperative Societies (RCS), if the cooperative banks are to be regulated
effectively. The State Governments should in the meantime, enter into an
appropriate memorandum of understanding (MOU), agreeing to desist from
interfering directly or indirectly in the management of the finances of these
banks.
5.08 In short, a radical change is necessary in
the way cooperative credit societies are constituted, managed and regulated at
present. That such change is essential for reviving and revitalising the system
has been strongly emphasised by the Capoor, Vikhe Patil and Vyas Committees.
The need for change in the Cooperative Credit Structure (CCS) has also been
widely appreciated by chairmen and chief executives of cooperative
institutions, senior officials of state cooperative departments, and leading
public figures, who have argued for reform, as well as representatives of trade
unions of cooperative sector employees – all of which has been of little avail. State Governments have shown
little inclination towards the needed reforms. There is, as a matter of fact, a
strong opposition to reforms from entrenched vested interests, who stand to
lose control over the very considerable resources channelled through the
cooperatives.
5.09 Exhortation will not lead us far. Strong
inducements are imperative. To break the impasse and induce essential and basic
institutional reforms, it is essential to link eligibility for assistance and
its release to the implementation of reforms in the Revival Package. The vision
of the Task Force is that in the long run, the financial cooperatives should
turn into the self reliant, member centric institutions, envisaged by the Self
Reliant/Mutually Aided Cooperative Societies Act. It has to, however, take into
account that the Cooperative Societies Act (CSA) has been in vogue for so long,
that it has acquired a settled status.
5.10 The Task Force is of the view that rural
financial cooperatives should be dealt with as a distinct and separate class
and recommends incorporation of a
separate chapter in the extant Cooperative Societies Act, for the cooperative
banks. The Task Force believes that the introduction of a separate chapter will
at last pave the way for focused attention on cooperative banks and their
superintendence and governance. Having said this, the Task Force reiterates,
indeed exhorts, State Governments to
take steps to ensure that the suggested measures acquire the force of law, as expeditiously as
possible.
5.11 In the interregnum and in view of the fact
that the process of revitalising the CCS cannot be delayed, the Task Force
recommends that the State Governments enter into MOUs with Regulatory and
Supervisory agencies, for facilitating an appropriate governance and
superintendent structure. Accordingly, the Task Force, has prescribed a working
draft of a Model Bill (Annexure XX). The Task Force has also prescribed the
provisions to be incorporated as a special chapter in the extant Cooperative
Societies Act in Annexure XXI, and an indicative list of items which should be
included in the MOU between the State Government and RBI in Annexure XXII.
Conditionalities relating to Reform
measures
5.12 The Revival Package for the CCS entails
assistance for financial restructuring of the cooperative societies, provided
of course
their State Governments agree to participate in the package. It is also
imperative that the State Governments make a formal commitment to make
specified changes in their legal and administrative framework, relating to the
functioning of cooperative credit institutions. Although, the willingness for
participating in the Revival Package will be totally optional, once exercised,
the concerned State Government and the CCS units will have to accept the entire
package in toto. There cannot be a pick and choose method for various
components of the package. The key elements of which are :
• State
Governments should accept the Union Government’s scheme in full, including the legal and regulatory changes,
institutional reform, and their share of financial commitment
• State
Governments not in agreement now may be given two years to consider, after
which participation in the Union Government’s scheme may stand closed
• PACS, DCCBs and SCBs to also have the option to exercise options available in the scheme
5.13 Release of funds will be linked to the progress in actually implementing the Revival Package, by taking the following steps on credit societies in their jurisdiction:
(i) State
governments retire their contribution to the share capital of such credit
societies.
(ii) Boards of
management are reconstituted to ensure that they are elected, and that they do
not include any State Government nominees.
(iii) DCCBs and
SCBs accept the fit and proper criteria (to be prescribed by the RBI) of
eligibility for Board membership and for co-option of a specified number of
professionals as full members with voting rights, if members with such
qualifications do not get elected.
(iv)
Professionally qualified CEOs (qualifications to be prescribed by RBI and
selected candidates, to be also approved by the RBI) are appointed at
cooperative banks and properly trained personnel as secretaries to PACS.
(v) Abolish the
cadre system of all employees at all levels
(vi) Ensure that
CEOs and all staff of credit cooperatives (including cooperative banks) at all levels, are appointed by the cooperatives
themselves and that they also decide on their service conditions. All employees
are answerable only to the Boards of the credit cooperatives.
(vii) In all cases
limit the powers of the Board to overall policy and reviewing loan decisions,
leaving the CEO and his staff free to screen, appraise and decide on individual
loan applications and to take such action as is necessary, to ensure prompt and
full recoveries.
5.14 The Task Force also recommends that, in the interests
of prudent management,
• All thrift and credit cooperatives including primaries and their federal structures be required to increase owned capital, so as to ensure a minimum CRAR of seven per cent to begin with, and to raise it to 12 per cent within another five years;
• Encourage
the Cooperative Credit Structure to set up its own system of technical support,
supervision, and even deposit protection;
• Societies to
have full freedom to choose institutions from which they can borrow and in
which they can deposit their funds, and also to decide on affiliating with, or
abstaining from a federated structure of their choice;
• Entrust
audit to chartered accountants at all levels of CCS
The State
Governments and CCS institutions should further agree to:
• The
principle that assistance will be available only to viable or potentially
viable societies (as prescribed by the Task Force) and that those which are
defunct or non-viable should be liquidated;
• The
determination of the quantum of assistance to which individual institutions are
eligible, will be based on a special audit of their accounts for the year
2003-2004, under the supervision of the implementing authority to be created
for the purpose;
• Participate
in programmes to train personnel, upgrade internal accounting, reporting and
control systems at different levels to better equip them for credit management.
5.15 Extensive direct or indirect interference by
State Governments have been a major cause for the deterioration of the
cooperative credit system. Interference
in the credit cooperative system occurs through directives on deposit and
lending rates, lending priorities, investment decisions, taking up non-credit
activities etc. or granting interest subsidies, postponing waiver of recovery of
interest on loans and repayment of loans given by cooperatives. It is,
therefore, important that governments, both at the Centre and in the States,
desist from these practices and adopt a firm policy to prevent these practices
and introduce appropriate changes in law
.
5.16 States should formally agree, through an
explicit MOU with the Reserve Bank of India, to be formalised by appropriate
amendments to their cooperative laws, to leave all financial regulatory
functions to the designated authority under the BR Act, and to abide by their
decisions in these matters.
5.17 For its part, the central regulatory
authority should take steps to
(i) Let cooperative societies in all tiers choose not to take any public (or non-voting member) deposits and thereby, be free from the purview of the BR Act; and at the same time
(ii) Tighten the
financial regulation, including prudential norms and procedures applicable to
cooperatives accepting public deposits, by bringing the norms (relating to
minimum capital capital adequacy, NPA, CRR-SLR) closer to, or identical with,
those applicable to commercial banks; and
(iii) Consider
linking premium rates for deposit insurance cover under DICGC, the scale and
terms of refinance through NABARD (or commercial banks/RRBs) as well as access
to the national payments system to the financial health of the cooperatives as
well as degree of compliance with regulatory norms.
5.18 Each participating State must take credible
steps to fulfill these conditions. The Task Force recognises that all these
issues cannot be tackled immediately or at one stroke. The Reforms will, therefore, have to be
phased. The release of assistance should, however, be linked to progress in
fulfilling the agreed sequence of reforms, within a clear time frame. In
specifying these, it is important to recognise that the situation (in terms of
legal and administrative framework, and the nature and severity of the
problems) vary widely from state to state. It is also important to recognise
the fact that, there can be no “one-size-fits-all” model. The States,
therefore, should have reasonable freedom to decide the pattern they want to
follow to realise the basic aims of the Restructuring Programme within a
reasonable period.
Main features of the Proposed Legal and
Regulatory Reforms
5.19 Fulfilling the conditions of the
Restructuring Programme will require drastic changes in the State laws, that govern Cooperative Credit Societies and
a clear undertaking by the State Governments to accept the authority of the
Reserve Bank of India (RBI) in all matters concerning financial regulation of
cooperative banks.
5.20 Some conditions, like retiring the State’s
contribution to equity and withdrawing nominees from the boards can be done by
Executive Order, pending formal amendment of the existing law and through
voluntary restraint. So can training and tightening of audit. The changes meant
to redefine and limit the role of RCS to registration, conducting regular elections and annual general meetings,
ensuring independent audit and liquidation proceedings, as well as those
precluding government interference in matters relating to financial management,
will call for drastic amendments to the existing law. Implementing the
prudential regulation of DCCBs and SCBs can be achieved to some extent, in the
meantime, through appropriate MOUs between the State Government and the RBI.
5.21 Since a new enactment is a time consuming
process, the Task Force has identified and recommended specific parameters on
actions that can be initiated, by participating State Governments, by means of
Executive Orders issued under the extant CSA. Such an Executive Order would
cover the following :
• Ensuring
full voting membership rights on all users of financial services including
deposits
• Removing
State intervention in administration and financial matters
• Withdrawing
restrictive orders, if any, on financial matters
• Permitting
cooperatives wider access to financial institutions
• Permitting
cooperatives registered under parallel Acts (in
States applicable) to be members
of cooperatives, registered under the CSA and vice versa
• Limiting the
exercise of powers of the State Governments to supersede Boards
• Ensuring
timely elections and audits
• Facilitating
effective exercise of the regulatory
authority of the RBI, in case of
cooperative banks
• Exiting
state equity and participation on Boards of financial cooperatives
• Prescribing
prudential norms, including CRAR for PACS on lines suggested
5.22 The Task Force has analysed the reasons for
the opposition to amendments earlier proposed to the B R Act. It has concluded
that the opposition was because of apprehension
that the proposed amendments sought to bring in improvements in the
governance of the banking cooperatives, by disregarding the cooperative
character of the banking cooperatives, which is distinct from banking companies.
5.23 The Task Force has, therefore, recommended
that while professionalism is necessary in the governance and management of financial
cooperatives, it needs to be done with due regard for the characteristics of
the membership of the financial cooperatives. The Task Force recommends that
steps be taken by the RBI to have the B R Act suitably amended to ensure the following :
• Bringing
cooperative banks on par with commercial banks in terms of prudent financial
regulation
• Prescribing
fit and proper criteria consistent with the membership of cooperatives for
election to the Boards. To ensure professionalism in the Boards, however, three
or four members with prescribed qualifications should be co-opted with voting
rights in case members with prescribed qualifications do not get elected
• Prescribing
minimum qualifications for CEOs of the cooperative banks and approving their
names
• Prescribing
capital adequacy norms for cooperative banks (to be implemented in a phased
manner)
• Prohibiting
any cooperative other than a cooperative bank from accepting public deposits
from any person other than its members.
• Prohibiting
any cooperative other than a cooperative bank,
from using the words “bank”, “banker”, “banking”, or any other derivative of the word “bank”,
in its registered name.
5.24 As cooperative banks are at present, being
concurrently supervised by the NABARD, the Task Force also recommends that
NABARD be empowered suitably to improve
the effectiveness of its supervision.
Changes in cooperative laws
5.25 While some of the necessary changes can be
implemented through Executive Order, under the existing State laws, formal
legislation to repeal or modify existing laws will be necessary. The Model Coop
law, suggested by the Brahm Perkash Committee, and endorsed by all recent
committees which have gone into this issue, is consistent with the kind of
regime, which we think is necessary for healthy functioning of cooperatives as
democratic, member-driven and self reliant organisations.
5.26 Even though several States have enacted new
laws on this pattern, they have not made much of an impact. In all these
States, most societies continue to operate under the regime of the extant CSAs,
with hardly any effort to enable or encourage existing societies to come under
the new law. Part of the reason is the
absence of provisions in the pre-existing law to permit and enable existing
societies to come under the new law. A stronger reason is, perhaps, the
non–availability of refinance to such
cooperatives, registered under the new Acts.
5.27 The draft law suggested by the Task Force, is
based on the Constitutional right of citizens to form associations. It provides
space for citizens (especially disadvantaged communities who need to work in
cohesion for their own advancement), to work together on the economic front. As
in the case of the Companies Act, potential members are required to register
their agreement with one another, their Memorandum and Articles of Association,
and thereby to acquire body corporate status. The power of the RCS should be
limited to ensuring that the memorandum and bylaws are consistent with the
basic principles of governance laid down in the law. There should be no
requirement that the details and specifics of these documents be subject to
government approval.
5.28 During interactions, it was pointed out to
the Task Force that the Acts governing credit cooperatives need not be detailed
legislation. In the light of the complexities in the existing legislations,
however, the Task Force is of the opinion that the legislation for financial
cooperatives needs to be simple, but comprehensive. It should also preclude any
subordinate legislation, while ensuring that decisions on financial matters are
vested only with the cooperatives and their regulation fully vested with the
RBI, in case they are cooperative banks.
5.29 The proposed Model Law indicates (a) the essential
basic principles of constitution and internal governance which societies must
observe; (b) specifies the governments’ role in ensuring that the spirit of the
law is observed, that elections and annual meetings are held regularly and
audited accounts of prescribed standard are presented at these meetings; and
(c) should restrict the State Government from interfering directly or
indirectly in the internal management of societies, especially in matters
affecting the financial health of the societies. It should explicitly recognise
the RBI as the sole authority to use its powers under the BR Act to ensure
observance of prudential norms by Cooperative Credit Societies, that accepting
public (i.e. non-member) deposits.
5.30 It is an enabling, not a regulatory law.
Considering the almost non-existent rate of conviction under most cooperative
laws, other regulatory laws will be fully applicable in cases of criminal
action. At any rate, an enabling piece of legislation ought not to transgress
on what specialised regulatory laws are better equipped to deal with.
(i) The law is
based on internationally accepted principles of cooperation and ensures that
cooperatives function in a democratic manner.
(ii) The draft is member-centric. It ensures that members are in control of their organisation, and that they can hold accountable those they elect. It places responsibilities on members, and it gives them the right to manage their own affairs, based on the responsibilities that they choose to fix for themselves.
(iii) It places
responsibilities on elected Directors in such a manner, that elected positions
are positions of responsibility and not of power and authority. Accountability
of the Directors to the General Body is in-built, and any lapse is treated
seriously. Director behaviour is expected to be reported to the General Body
for its scrutiny.
(iv) The Model
Law makes it clear that cooperative societies are not creatures of the State –
nor are they statutory creatures. Membership in these societies is voluntary,
not involuntary as in a Gram Panchayat. The question of establishing Election
Commissions for holding their elections, therefore, was considered
inappropriate by this Committee. As in the case of companies, societies, trade
unions, and unincorporated associations, elections will be an internal affair
of each organisation.
(v) For similar
reasons, an Audit Board is not envisaged under this law. The General Body of
each cooperative society will appoint an auditor, and the responsibilities of
the auditor have been made explicit. Presentation of copies of the audited
statements of accounts for the previous year, along with audit objections, to
each member has been made compulsory.
(vi)
Recruitment of staff will be the
responsibility of each cooperative society. Common cadres,
and recruitment boards are not envisaged. Just as other forms of citizen
organisations (companies, societies, trade unions, unincorporated associations)
take responsibility for staff recruitment and personnel management, so, too,
cooperative societies should have the right to make all staff related
decisions. Labour laws are expected to apply.
(vii) Profit
(surplus) and loss (deficit) are to be shared among members. Cooperatives are
expected to be professionally managed in the truest sense of the phrase, as
Directors have to face their General Body each year and recommend
surplus/deficit sharing to members.
(viii) The law is
for cooperative societies based on mutual aid among members. While cooperative
societies are permitted to accept member savings and deposits, and borrowings
from others, they are not permitted to accept savings from non-members. In case
a cooperative wishes to accept public (non-voting member) deposits, however, it
will have to be licensed by the RBI and follow such other regulatory norms as
prescribed by the RBI.