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