The Achilles’ heel

By Lekshmi Parmeswaran
In Cover Story
April 4, 2016
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Corporate governance is an element that is lacking in cooperative banking and can bring about the sector’s downfall

coopertiave“Necessity is the mother of all inventions” has become as clichéd a term as ever. But truth remains that for humankind adversity has been the greatest teacher as well as giver. The idea of cooperative movement emanated from this very concept. Faced with utter misery, the poorer sections of the society had all doors closed even for their basic sustenance. It was then that an inclusive developmental model was first proposed by Hermann Schulze and Friedrich Wilhelm Raiffeisen in Europe. The goal was to make credit easily available to those in dire need. India with its myriad problems emulated this model in 1904 by enacting the Cooperative Credit Societies Act. From then on cooperative banks became synonymous with an egalitarian order where every member had an equal stake in the organization’s functioning.

However as happens with most of the good things, cooperative banking also degenerated with external elements seeping into the decision making realm and altering its initial goals. With more than 200 million members and 67 per cent penetration in villages, India has one of the largest networks of cooperative banks in the world. Such a large reach has unfortunately affected the efficiency of the system as a whole. Corporate governance or rather the lack of it has become the biggest factor hindering the growth of this sector. There is no denying that many co-operative banks have become big and are managed professionally with transparency and efficiency, they are few and far and sector in general suffers from poor corporate governance.

Grey areas

Cooperative banking in India is arguably a complex world. The lack of clarity in its functioning has meant that rules and regulations could be twisted to fulfill vested interests. Every cooperative bank functions according to its own rulebook which makes it all the more difficult for the common man to understand its intricacies.

Though cooperatives came into existence to promote the spirit of cooperation in communities, today they have drifted far from that goal. Right from the time of independence, the governments in power have projected cooperative banking as a medium to propel equitable growth and have been involved in all the decision making processes of the banks. The people at the helm of many of the cooperative banks have affiliation to one political party or the other. This has resulted in the banks doling out many loans without taking into account the principles of asset management and recovery risks.

The lack of a transparent mechanism to deal with the issue of nonperforming assets has further compounded to the woes of the cooperatives. The multiple centers of power have eroded the idea of equal membership for all. The arbitrary decisions taken by those who have the required money power has to a considerable extent silenced the voices of the other members. Board members are often seen to override sound banking principles for the sake of short term goals.

Moreover, barring the big ones, none of the other cooperative banks have been able to establish good management practices within the organizations. Insufficient funds are often cited as the reason for this. But the question that arises here is, are funds required to provide effective leadership? The very definition of leadership means making optimum use of the available resources. But cooperative banks in India have failed to capitalize on its talent pool which in short supply in any case. Very often it happens because most of the banks do not understand the need to train already skilled workers. Knowledge can be converted into a powerful tool only when proper guidance is given to those who are in charge of executing responsibilities.

Another problem with regard to skill management is that the Indian cooperative banks have not been able to attract quality staff. The low pay structure is one of the primary reasons why qualified individuals shy away from thinking of cooperatives as a career path. Also, over the years the powers of Chairman have exponentially grown which has greatly reduced the role of consensus in decision making. Such power centers and laxity in rules and regulations has corrupted the system from within.

Inadequate infrastructure is yet another reason hindering the progress of cooperative banks. Many of the institutions in rural areas are still not computerized which makes it difficult to keep a tab on their actions.

Time for reforms

The role played by the corporative banks in the Indian economy cannot be overlooked. It gives stability to the internal economy by insulating it from the fluctuations in the global financial market. For rural India, cooperative banks on most occasions turn out to be the only source of institutional credit. If run systematically, these institutions have the potential to alleviate poverty and make people self-reliant. And in a country where more than half the population is still dependent on agriculture, it will not be an over statement to say that well managed cooperative banks can propel India to greater economic growth and fiscal stability.

There is an urgent need to restructure these banks by bringing them under a single regulatory ambit. Uniformity in rules is the first step in making these banks accountable. Along with this, general body election should be made more transparent where every member gets equal rights in practice and not just on paper.

The main aim of the cooperative banks was to eliminate the role of money lenders and give the needy access to credit. Unfortunately even after all these decades the goal remains unachieved. The interest rates charged by cooperatives on loans are unaffordable for many in the agricultural sector. One way to solve this problem is to offer differential interest rate in accordance with the asset value.

To implement this, what is required is a set of highly skilled staff. Though many states now ask for Higher Diploma in Cooperation (HDC), it is not sufficient to equip the employees to deal with practical challenges. Promotional institutions like National Federation of Urban Cooperative Banks and Credit Societies Limited (NAFUCB) do offer high level training modules to the officers on how to tackle the issues of cooperative banking. But since the nature of these programs is voluntary and not mandatory, the benefits of it do not percolate down to every level. So efforts should be taken to make these training programs all inclusive which would mean even the primary credit societies should come under its ambit. This will enable the employees to identity NPA’s and grant loans accordingly.

Another factor as has been discussed is the lack of technology. Here again, the promotional agencies have a greater role to play. In the current scenario, big cooperative banks outsource the banking software from elsewhere. This requires a lot of money, something which the smaller cooperatives can ill-afford. What can be done is to develop uniform software for all the cooperative banks and create a provision where cooperatives that do not have the financial means to buy it are given interest free loans. Only systematization will be able to plug the loopholes and stop the exploitation that has become rampant.

The cooperative banks in an area can also form a consortium where they pool in their resources to offer facilities like ATM and mobile banking to its members.  Cooperative banks in Gujarat  have implemented this model on an experimental basis. Otherwise, an apex bank can offer these facilities on behalf of the cooperative banks. Getting experienced personnel from the commercial banks would be a good step in working out the modalities of such a partnership.

There is an urgent need to stop the practice of letting cooperatives catering to the same objectives function in an area. Often this is done, by slight tweaking in the words. Such a practice defeats the very purpose of the movement. The aim of cooperative banks is to facilitate an environment where people with same interests can come together and find a solution to their problems. Yet another major concern is the restricted ways in which loans are given. For example an agricultural society should be able to cater to all needs of its members and not place conditions where money is released only for some stated purposes.

In the end, no plan will work without accountability. Taking a cue from the New Companies Act, board of directors should be made accountable to the decisions taken by them. There should be timely dispersal of information to all the members. In addition to this, yearly auditing and inspection should be conducted by an external agency. Those in power should be made personally liable for any malpractice in the organization’s functioning in order to bring in the much needed efficiency.

These measures are but a start to clean up the mess in the sector. The importance of cooperative banks should be seen in the larger perspective of food security and employment generation. Both the rural and urban economies with highly unorganized portions are in need of reliable finances. Especially, for the agricultural sector, institutional credit can go a long way in addressing the problems of ever growing debts. A greater flow of finances will ensure prosperity of not just the farmers or entrepreneurs but the country as a whole.

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