Draft Final Report of the Task Force on Revival of Cooperative Credit Institutions
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.