Co-ops make good business sense

By B Yerram Raju

The Union government by establishing the Ministry of Co-operation has brought the agenda for cooperatives as a policy instrument for financial inclusion to the fore. The last vestige of policy can be found in the Sixth Five Year Plan. Union Minister Amit Shah recently said a cooperative policy is in the offing and National University for Cooperatives is also on the cards.

The focus of the policy would appear to be on the existing three-tier short term cooperative credit structure – Primary Agricultural Credit Coop Societies, District Central Cooperative Banks and State Cooperative Bank (Apex Bank), in consultation with the National Bank for Agriculture and Rural Development (Nabard).

This article focuses on the approach to cooperative policy as a federal instrument.

Keeping Values Intact

A cooperative is a member-driven, member-owned and member-participated institution registered with the State Registrar of Cooperatives on a set of model by-laws. The professional practice should be based on ethical values of community, quality, service, stewardship, honesty, openness and social responsibility.

Indian cooperatives had their origin in the farm sector way back in 1904. Their spread in finance and non-finance areas, numbering around 5 lakh, was founded on the same principles as those of rural credit cooperatives while different cooperatives required different treatments under the law. The 2008 economic recession proved that cooperative businesses are more resilient and sustainable.

Then United Nations Secretary-General Ban Ki-moon asserted the importance of cooperatives for financial inclusion and sustainable development. “Inequality is a fundamental obstacle to development, depriving people of basic services and opportunities to build better lives for themselves and their children. The cooperative model helps meet this challenge. Cooperatives strive to uphold the principles of equality and democratic participation,” he said.

The Indian cooperative movement, comprising around 6 lakh cooperatives in all sectors of human activity, is arguably the largest cooperative movement in the world. There are heart-warming successes as also disappointing, if not dispiriting, failures.

Policy Framework

Ever since the cooperative movement started, about 20 committees and Commissions of the government of India and the Reserve Bank of India (RBI) have untiringly reiterated the need for adoption of a policy framework for
their development. Even the Constitution was amended exhorting States “to promote … Co-operative societies.”

While there is a National Cooperative Policy formulated in 2002 to facilitate all-round development of cooperatives, it was not incumbent on the States to adopt it as cooperatives is a Concurrent subject — each State depending on its own needs and status of development formulates its cooperative policy. The same fate may befall the proposed policy attempt if the spirit of federalism is not integral to the policy.

United Andhra Pradesh had the twin policy of promoting State-partnered, State-funded and State-promoted and regulated co-operatives under the 1964 Act, and member-led, member-controlled, member-governed, liberal cooperatives under the Mutually Aided Cooperative Societies (MACS) Act, 1995. Both the streams have not succeeded in fostering an environment for the growth of cooperative enterprises as people-led and people-sponsored economic enterprises despite their presence from brooms to looms, farm to fork, industry to insurance, milk to fish and eggs, savings to credit both in the urban and rural, housing, petrol and diesel outlets, and retail consumer outlets.

Shrinking Presence

In the name of viability, over the last three decades, 14,000-odd cooperative credit societies in the combined AP shrunk to around 3,000 providing space for commercial bank and regional rural bank branches (RRBs) precisely in the same centres the cooperative credit societies exited. It should be obvious that no branch of a commercial bank or RRB will be established without consideration of viability.

Experience from around the world shows that cooperatives have been strong in countries where they have received definitive policy support from the respective governments in the initial stages. (Eg, China, the US, Italy, Germany, Netherlands, France, Canada)

According to ‘Cooperatives and Sustainable Development Goals’ (ILO-Policy Brief 2015), cooperatives contribute to sustainable development and hold the potential to do much more: from creating employment and enhancing gender equality to providing clean energy and financial inclusion to ensuring food security and extending social protection. With their business models “built on inclusion and sustainability, they offer a pathway towards economic, social and political justice for all.”

Telangana’s Initiatives

Post bifurcation, Telangana did not lose the opportunity to look at rural cooperatives. It revamped the Board of the State Cooperative Apex Bank and gave a fillip to technology as a base for strengthening the grassroots short term cooperative credit structure. At a cost of Rs 3-4 lakh per PACS (Primary Agricultural Credit Society), Intel-Unite, a software firm, digitised 820 PACS and integrated the functioning of DCCBs and SCB with core banking.

The digitisation effort merited appreciation by the NITI Aayog. It provided a business sense to the PACS as integral to the development of the rural economy.

Except for the last two years, ever since Nabard took over supervision responsibility from the RBI, the actual number of societies, amount of lending and refinance, and the quality of institutions dwindled sharply. This became a cause for concern for the regulator. The RBI started licensing the DCCBs to improve the quality of lending and by imposing Basel I norms for strengthening prudential norms and capital accumulation.

The cooperative policy framework should address the issue of achieving integration of different stakeholders to ensure effective change management, establish good governance, resolve political issues that had endangered their growth thus far and expand the presence of cooperatives as a people-led movement. The imperative should be to provide an identity and rebuild the trust in cooperatives through an appropriate policy that essentially operates at the State level. Banking on cooperatives makes good business sense.

(The author was member of the RBI Expert Committee on Short Term Cooperative Credit Structure (2012). He is grateful to P Basant Kumar, former Joint Secretary to Governor of AP and Telangana for the discussions on the subject)

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