Climate change requires collective action and the large member base of co-ops offers a powerful platform of communication

By B Yerram Raju

Politics and economics have intertwined significantly in their developmental journey. Over the past 120 years, the growth of cooperatives has been pivotal. Interestingly, for the last 75 years, nearly every senior politician elected to legislative bodies had roots in cooperative societies, be it Primary Agricultural Credit Society (PACS), District Central Cooperative Banks (DCCBs), Super Bazar or multi-purpose cooperative societies, serving either as president, vice president or executive member.

Cooperatives held a distinct position in all Five Year Plan documents until the Third Five Year Plan. After the economic reforms of 1991, their prominence faded only to see a resurgence under the second term of the NDA government, which established a separate Ministry of Cooperation in 2021. On this International Cooperative Day, it’s crucial to assess the landscape of cooperatives in India and explore avenues for adopting best practices to ensure their sustainability. Cooperatives are seen as essential for achieving inclusive economic growth.

The International Cooperative Alliance has noted that cooperatives were overlooked in the Sustainable Development Goals agenda, suggesting that greater strategic involvement of the cooperative movement globally could elevate their recognition and influence in international debates.

Federated Structure

Currently, many States are actively conducting elections to PACS and DCCBs. Once these processes are completed, the Boards of State Cooperative Banks will be reconstituted with new presidents of DCCBs, thereby concluding the political process. However, the dedication of these leaders to local and regional economic development remains uncertain.

Cooperatives, whether rural, urban or in banking, play a crucial role in aggregating resources and services with a federated structure that can foster partnerships from grassroots to global levels. They are viewed as a critical path to achieving rapid, equitable and inclusive growth, emphasising ownership, member-centricity and democratic principles. The National Cooperative Policy aims to promote ‘Prosperity through Cooperation,’ aligning economic, social and cultural transformation with cooperative principles. It recognises cooperatives as embodiments of self-help, democracy, equality and solidarity, and fundamental rights under the Constitution.

However, cooperatives face numerous challenges including capital access, member awareness, governance issues, regulatory compliance and technological adoption. Achieving uniformity in cooperative legislation across the States has been historically challenging due to dual control by the union and State governments. The recent initiatives by the Centre and Nabard, however, have rejuvenated rural cooperatives with substantial investments and modernisation efforts. The National Cooperative Database underscores their extensive presence across agriculture, livestock, fisheries, banking, and other sectors.

Digitalisation

The Reserve Bank of India acknowledges that rural cooperatives’ data is one year behind due to delayed closure of accounts by PACS and DCCBs, often extending to June of the following year. This delay is exacerbated by backdated deposits and managed non-performing assets (NPAs) to portray better performance. Telangana was one of the first States to computerise all the PACS, DCCBs and SCBs (State Cooperative Banks) after cleaning up the legacy data and reconciling the data inconsistencies. Around 25,000 such societies in Maharashtra, Rajasthan, Madhya Pradesh, and Uttar Pradesh are in the process of cleaning up the legacy data and reconciliation.

The National Cooperative Policy recognises cooperatives as embodiments of self-help, democracy, equality and solidarity under the Constitution

Among the 1,502 urban cooperative banks (UCBs), about 300 have capital exceeding Rs 500 crore, all equipped with ATMs, computerised operations and net banking facilities. UCBs, governed by both State cooperative Acts and the Banking Regulation Act, 1949, contribute significantly to the financial sector, with scheduled and non-scheduled UCBs showing credit growth rates of 6.7% and 4.9% respectively, as per the RBI’s Financial Stability Report June 2023.

Globally, countries like South Korea, the UK, Australia and Canada exemplify best practices in election conduct, board member training and governance in cooperative banking. Cooperative banks in India compete effectively with commercial banks in sectors like real estate and retail, offering dividend payouts and shareholder gifts annually. Noteworthy examples include successful cooperative banks like Sewa Bank and Mann Deshi Mahila Sahakari Bank, led by women entrepreneurs. Mann-Deshi, formed by marginalised vendors after being denied loans due to illiteracy, stands out for its fair banking practices for over 25 years.

Major Challenges

Governance remains a concern with elected boards often interfering in operational matters. Business development plans lack a bottom-up approach, technology and human resources planning, impacting strategic effectiveness. Despite these challenges, UCBs generally maintain a stable capital-to-risk weighted assets ratio (CRAR), ensuring financial stability.

Resolving governance dichotomies between General Body oversight in cooperatives and Board supremacy in financial institutions requires amendments to Cooperative Acts by State governments. Adhering to the principles of the International Cooperative Alliance should theoretically ensure good governance, yet UCBs often prioritise customer service over rigorous risk management practices.

The National Cooperative Policy recognises cooperatives as embodiments of self-help, democracy, equality and solidarity under the Constitution

The Board of Management is intended to support and advise the Board of Directors without possessing delegated authority. This creates ambiguity, which could be resolved through negotiations with State governments to allow elected Boards to nominate directors from professional backgrounds who meet fit and proper criteria. Such measures would enhance the Board’s capabilities.

Additionally, regulatory attention should focus on training directors, evaluating their contributions to the bank and fostering their engagement in institutional stability and sustainable growth, possibly through annual retreats.

Task Force

To address dual regulation issues under State cooperative Acts and Banking Regulation Act, several States have established Task Force on Cooperative Banks (TAFCUB). However, its agenda is predominantly set by local RBI offices, with minimal input from State cooperative registrars and associations. Over the past decade, TAFCUB’s operations have become routine. To improve efficiency and address local regulatory challenges effectively, its agenda should become more consultative and action-oriented, involving all stakeholders.

The general body of UCBs and State Cooperative Act Bye-Laws sometimes override RBI regulations, necessitating TAFCUB to act as a mediator. In cases where TAFCUB decisions conflict with the RBI inspection findings, they should resolve discrepancies.

Priority Sector Lending UCBs can directly lend to self-help groups (SHGs) or joint liability groups (JLGs) under Board-approved policies, supporting activities in agriculture, micro-enterprises and micro-services like single transport vehicles.Given their limited operational scope compared to commercial banks and regional rural banks, UCBs face challenges in meeting the mandated 40% allocation of Adjusted Net Bank Credit to priority sectors. This disparity could lead to financial losses and potential closures for UCBs engaged in other permissible lending activities.

National institutions like the National Dairy Development Board (NDDB), Indian Farmers’ Fertilizers Cooperatives (IFFCO), training and research institutions like Vamnicom, National Federation of State Co-operative Banks Ltd, and the National Federation of Urban Cooperative Banks and Credit Societies Ltd have a key role to play in making cooperatives look outwards and enable them to run as economic institutions rather than as political outfits serving interests of a few individuals.

Shared interests and resources will change the face of cooperatives as economic enterprises. Climate change requires collective action to reduce carbon emissions and all institutions, including cooperatives of all types, have a responsibility to educate their members of the consequences of the impending climate disasters. Cooperatives offer a powerful platform of communication with large groups of persons and concerted action is possible towards sustainable development.