Credit Co Ops India

8/8/2019 Credit Co Ops India

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What do we know about creditcooperatives in India and its role

in the microfinance landscape?

Regulatory environment and institutional design of creditcooperatives in Maharashtra and Andhra Pradesh

Frida Ruiz


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What does theory say about coop.?

Cooperatives and ROSCAS are roots of microfinance

Collect fund from savers and allocate them to borrowers

Members do not have to wait turn to borrow

Borrowers and savers are shareholders: member-owned and member-

managed

Social sanctions in place: belong to same community + own shares

Incentives to monitor and enforce contracts are linked to institutional

design. Motivation driven by ownership (Morduch and Armendriz -05 & Barnerjee, Besleyand Ginnane-94)

Role in mobilizing local deposits, peer monitoring and addressing risk


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Antecedents of legal environment

Introduced in India by the British to fight Mahajan in rural areas

Cooperative CreditSocieties Act 1904 (Raiffeisens model)

Cooperative Societies Act 1912 new types: multi purpose societies

Development of societies in Bombay and Madras due to the mortgage right

in land. Reforms Act 1919: cooperation became a provincial subject.

Organization and control under the Register of Cooperative

Bombay pass coop societies Act 1925, Madras 1932, Bihar & Orissa 1935.

Central Bank in 1935. Took up program to provide cheap finance foragriculture for production purposes


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Proper environment? Started to provide cheap credit to farmer due to the vital position of

agriculture in the economy and avoid more famines

Cooperative movement in India has not sprung up from people.Initiated by gov. to solve rural indebtedness (tool)

Not on voluntary efforts of people to help themselves but on the gov.

support.

State intervention and control (by register of cooperatives and gov. share)

Lack of managerial education

Emphasis on organizing village institution not based on mutual helpnor on spirit of cooperation


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Regulatory environment in Maharashtra

3 tier-structure: State Cooperative Banks, District Cooperatives Banks, PrimaryAgricultural Credit Societies (PACS). Other cooperatives. Dual control RBI and

Register. Complex structure!

Maharashtra Cooperative Societies Act 1960. Needs of traders and urbanpopulation covered by urban cooperative banks

Regulation allows high degree of state intervention (state share capital)

Control by register of cooperatives societies in decision-making (burden)

Political interference (business, management)

Predominant control in Board of Directors

Weavers from the state for loan repayments

Dependence on the state: fail to satisfy interest of members and motivation


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Does theory work in this context? Incentives of credit coop design are distorted

High levels of non-performing assets, erosionof deposits and losses (many PACS losses)

Institutions are seen as governmentinstitutions not member-owned (general

perception) Whose interest are they operating?

Social sanctions weaker: belong to samecommunity but own institution?

Weak incentives to monitor and enforcecontracts

Motivation not driven by sense of ownership

No incentives for savings in weak institution

Apparently No, third partydistorts incentives of the

pure institutional design.

Limited role in mobilizinglocal deposits, peer

monitoring and addressing

risk.


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Where is the microfinance space?

Hindustand Coop. Bank begins to work with ICICI bank (28/53).

Restrictions from the regulator (ROC)

Not borrowing from commercial banks permission (bribes?)

Regulation on interest rate: ceiling on spread (3%) from gov. funds.

Credit less than Rs. 50,000 are microcredit. JLG (3-5). Daily recovery (Nonrecovery 9% in cooperative).

Microfinance clients become members (share in capital).

Urban areas of Mumbai income generation and consumption

Leverage knowledge of the area. Already working in urban microfinance?

How institutional design encourages peer monitoring and social sanction?

Needed changes to make urban cooperatives to go to grassroots?


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Regulatory environment in AP AP Cooperative Societies Act 1964.

Same issues: state control and political interference, governmentempowered to rule, restrictions in investments and mobilization offunds.

Liberal Act 1995 creates Mutually Aided Cooperatives Societies

Other states followed but Maharashtra

Predominance of cooperation principles, reduced role of register

Government no shareholder, no presence in Board of Directors

Member- owned & member-controlled, autonomy in affairs byelaws

More liberty in financial transactions : savings mobilization frommembers and credits to members. No constraints as NGO-MFIs


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Where is the microfinance space?

18k MACS (3k converted), 41% are thrift cooperatives

(microfinance) and 18% dairy & 11 PACS converted. SHG federated under the legal form of MACS (Mahila Banks).

Coop. members are individuals. Target group of ICICI

Share contribution- ownership by members

Womans Thrift Cooperatives and Mens Thrift Cooperatives MACS by Cooperative Development Foundation (CDF) since90s

Members 79,238, 269 WTC, 176 MTC

Mobilizing resources? Total Funds: 4,055 lakhs. Loans 3211lakhs (surplus)


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Does theory work in this context(MACS)? Case of Womans Thrift Cooperatives: Model Swa -kru-shi meaning

One-Own Effort


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Case of Womans Thrift Cooperatives

Encourage savings as a first step to get a loan. Mobilizing savings?

Develop sense of membership and ownership Unlimited liability.

Fee for membership Rs 20 month. Size 300-1000 members.

Board of directors elected among themselves. Managed by members.Women empowerment. Form by residents of villages

Savings products: compulsory thrifts, recurringdeposit, fixed dep.

Form a JLG (5) to have 3 times savings asloans. Otherwise, 80% savings.

Social pressure: take the door! Social capital

Insurance, Rs. 10,000. Int. rates 18%, 15%, 12%

Spread 2%. Returns build capital, annual bonus

Some take advantage of techology. Role of CDF


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Does theory work in this context(MACS)?Apparently Yes. Proper

incentives in the

institutional design drives

social sanctions.

Seems to be a role inmobilizing local deposits,

peer monitoring andaddressing risk.

Incentives of credit coop design

Regulation give space for these institutions.

Institutions member-owned (generalperception)

Whose interest are they operating? theirs

Social sanctions in place: belong to samecommunity + own institution + membermanaged.

Use of social capital.

Stronger incentives to monitor and enforcecontracts

Motivation driven by sense of ownership

Incentives for savings in own institution


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how can regulatory environment shape institutionaldesign of credit cooperatives?

what implications does it have for the role of credit coopin microfinance?...

what is the space for credit cooperatives as conduits for

microfinance lending and mobilizing savings?.are social sanctions stronger in credit and thrift

cooperatives (same community + own shares)?...

if space identified, how can current cooperative work beleveraged?...

study on impact evaluation MACS-CDF? Innovative way

of working with them?...

??????


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Thanks

Photos by Frida Ruiz

Documents

Credit Co Ops India