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Submitted by
Sampark, Bangalore
To
United Nations Development Programme
(UNDP), New Delhi
March 16, 2015
National Study on Financial Cooperatives in the
Context of Financial Inclusion in India
Preliminary Report
2
Table of Contents
Abbreviations Used ................................................................................................................................. 4
Executive Summary ................................................................................................................................. 7
1 Introduction .................................................................................................................................. 12
1.1 Defining Financial Cooperatives ............................................................................................ 13
2 Experiences of Cooperatives ......................................................................................................... 15
2.1 International Experience ....................................................................................................... 15
2.2 History of Financial Cooperatives in India ............................................................................ 20
3 State of the Cooperative Sector .................................................................................................... 23
3.1 Cooperative Institutional Arrangement ................................................................................ 23
3.2 Organizations Promoting Financial Cooperatives ................................................................. 25
3.3 Products and Services of Cooperatives ................................................................................. 25
3.4 The Current Scenario of Indian Financial Cooperatives ........................................................ 27
3.5 Current Challenges Faced by Cooperatives .......................................................................... 30
4 Regulations in India ....................................................................................................................... 31
4.1 The Regulation of Cooperatives in India ............................................................................... 31
4.2 The Rationale and Principles of Cooperative Regulation ...................................................... 31
4.3 The Regulations ..................................................................................................................... 32
4.4 The Regulatory Gaps ............................................................................................................. 35
4.5 Recent Cooperative Promotion and Development Measures .............................................. 35
4.6 Regulatory Gaps and Recommendations .............................................................................. 37
5 Financial Inclusion and the Role of Financial Cooperatives .......................................................... 38
5.1 Definitions and Dimensions of Financial Inclusion ............................................................... 38
5.2 The History of Financial Inclusion ......................................................................................... 40
5.3 The Rationale for Financial Inclusion .................................................................................... 41
5.4 The Extent of Financial Inclusion in India.............................................................................. 41
5.5 Current Financial Inclusion Initiatives and Challenges in India ............................................. 42
5.6 The Place of Cooperatives in the Financial Inclusion Drive .................................................. 43
6 Going Forward and Conclusion ..................................................................................................... 44
Annexure 1: Organizations and Networks ............................................................................................ 51
Annexure 2: Outreach and Financial Health of Financial Cooperatives ............................................... 53
Annexure 3: Government Involvement in Finances of Cooperatives ................................................... 54
3
Annexure 4: Gross Non-performing Assets of Financial Cooperatives ................................................. 55
Annexure 5: Trend Analysis of NPAs of Financial Cooperatives ........................................................... 56
Annexure 6: Comparison of the Old State Cooperative Act and Sle Reliant State Cooperative Acts of
Three states .......................................................................................................................................... 58
Annexure7: Cooperative Acts Enacted across States ........................................................................... 66
Annexure8: State wise Financial Inclusion ............................................................................................ 68
Annexure9: Financial Inclusion Initiatives ............................................................................................ 69
List of Figures:
Figure 1: Dependence Trap ................................................................................................................... 21
Figure 2: Rural Cooperative Institutional Arrangement ....................................................................... 23
Figure 3: Organizations and Networks Promoting Financial Cooperatives .......................................... 25
Figure 4: NPAs as a per cent of Gross Advances ................................................................................... 29
Figure 5: Access to Financial Services ................................................................................................... 39
Figure 6: Percentage of Rural Credit by Difference Agencies. .............................................................. 43
Figure 1: Trend Analysis of PACSs’ NPAs as a Fraction of Gross Advances .................................... 56
Figure 2: Trend Analysis of DCCBs’ NPAs as a Fraction of Gross Advances ................................... 56
Figure 3: Trend Analysis of SCBs’ NPAs as a Fraction of Gross Advances ............................................. 56
Figure 4: Trend Analysis of PCARDBs’ NPAs as a Fraction of Gross Advances ...................................... 57
Figure 5: Trend Analysis of SCARDBs’ NPAs as a Fraction of Gross Advances............................... 57
Figure 6: Trend Analysis of UCBs’ NPAs as a Fraction of Gross Advances ............................................ 57
Figure 7: Financial Inclusion Initiatives ................................................................................................. 69
List of Tables:
Table 1: Financial Cooperatives vs. Other Financial Institutions .......................................................... 14
Table 2: Products and Services of Financial Cooperatives .................................................................... 26
Table 3: Outreach and Financial Health ................................................................................................ 28
Table 4: Government Financial Involvement ........................................................................................ 28
Table 5: Financial Inclusion-A Cross-Country Comparison ................................................................... 42
Table 1: Outreach and Financial Health ............................................................................................ 53
Table 2: Government Involvement .................................................................................................... 54
Table 3: Gross Non-performing Assets of Cooperative Banks ......................................................... 55
Table 4: Different Cooperative Acts across States ................................................................................ 66
Table 5: State-wise Index of Financial Inclusion .............................................................................. 68
4
Abbreviations Used
AFI - Alliance for Financial Inclusion
ADWDRS - Agricultural Debt Waiver and Debt Relief Scheme
AIRCS - The All India Rural Credit Survey
AP - Andhra Pradesh
ATM - Automated Teller Machine
B.R. Act - Banking Regulation Act, 1949
BC - Business Correspondents
BIRD - Banker Institute of Rural Development
BSBD - Basic Saving Bank Deposit
CAB - College of Agricultural Banking
CAMELS - Capital adequacy, Asset quality, Management efficiency, Earnings,
and Sensitivity to market risks
CBS - Core Banking Solutions
CCF - Central People’s Credit Fund
CFE - Centre Financier Entrepreneurs
CGAP - Consultative Group to Assist the Poor
C-PEC - Centre for Professional Excellence in Cooperatives
CRAR - Capital to Risk (Weighted) Assets Ratio
CRBBI - Cooperative Rural Bank of Bulacan, Inc
DCCB - District Cooperative Credit Bank
DICGC - Deposit Insurance and Credit Guarantee Corporation
DID - Développement International Desjardins
DIF - Deposit Insurance Fund
FPO - Farmers’ Producer Organization
FI - Financial Inclusion
FIF - Financial Inclusion Fund
FIP - Financial Inclusion Plan
FITF - Financial Inclusion Technology Fund
FLCS - Financial Literacy Centres
GESI - Gender and Social Inclusion
5
GIZ - Deutsche Gesellschaft für Internationale Zusammenarbeit
GoI - Government of India
ICA - International Cooperative Alliance
ICM - Institute Cooperative Management
IFC - International Finance Corporation
IIM - Indian Institute of Management
ILO - International Labour Organization
IMF - International Monetary Fund
IRMA - Institute of Rural Management, Anand
ISSC - Indian Society for Studies in Cooperation
IYOC - International Year of Cooperatives
KCC - Kisan Credit Cards
LT CCS - Long-term Cooperative Credit Structure
MACS - Mutually Aided Cooperative Societies
MLAs - Members of the Parliament
MoU - Memorandum of Understanding
MSCS - Multi-state Cooperative Societies
MSCSA - Multi-state Cooperative Societies Act
NABARD - National Bank for Agriculture and Rural Development
NABFINS - Nabard Financial Service Society
NAFCUB - National Federation of Urban Cooperative Banks & Credit Societies
NAFSCOB - National Federation of State Cooperative Banks Ltd
NBFC - Non-Banking Financial Company
NCARDB - National Cooperative Agriculture & Rural Development Banks’
Federation Ltd
NCUI - National Cooperative Union of India
NGOs - Non-Governmental Organizations
NPAs - Non-performing Assets
PACS - Primary Agricultural Cooperative Societies
PCARDB - Primary Cooperative Agriculture and Rural Development Banks
PCBs - Primary Cooperative Banks
PCFs - People’s Credit Funds
PSL - Priority Sector Lending
POS - Points of Service
RBI - Reserve Bank of India
RCPB - Reseau des Caisses Populaires du Burkina
6
RCS - Registrar of Cooperative Societies
RICM - Regional Institute of Cooperative Management
RIDF - Rural Infrastructure Development Fund
RRBs - Regional Rural Banks
SACCOs - Saving and Credit Cooperatives
SBV - State Bank of Vietnam
SCARB - State Cooperative Agriculture and Rural Banks
SFRC - State Finance Regulatory Commission
SRC - Self Reliant Cooperative
SCB - State Cooperative Banks
SHGs - Self-Help Groups
SHPI - Self-Help Promoting Institutions
SLR - Statutory Liquidity Ratio
STCCS - Short-Term Cooperative Credit Structure
SVB - State Bank of Vietnam
TAICO Bank - Tamil Nadu Industrial Cooperative Bank Limited
TISS - Tata Institute of Social Sciences
TNCUI - Tamil Nadu Cooperative Union
TNFUCB - Tamil Nadu Federation of Cooperative Urban Banks
TNSCARDB - Tamil Nadu State Cooperative State Agriculture and Rural
Development Bank
TNSCB - Tamil Nadu State Apex Cooperative Bank
TOR - Terms of Reference
UBCs - Urban Cooperative Banks
UN - United Nations
UNDP - United Nation Development Programme
VAMNICOM - Vaikunth Mehta National Institute of Cooperative Management
WASSAN - Watershed Support Services and Activities Network
WOCCU - World Council of Credit Unions
7
Executive Summary
The report provides an overview of the enabling environment for financial cooperatives in India,
particularly within the context of financial inclusion. We have drawn comparisons between the
experiences of cooperatives in other countries and in India, both historically and in the present.
Through this process, we have identified issues, challenges and recommendations, which are briefly
outlined in the following paragraphs. This report is based entirely on published information, and the
analysis of secondary data is preliminary to a more detailed set of interviews with a wide range of
stakeholders.
The experiences of financial cooperatives in India sharply contrast those cooperatives in the broader
international movement. Case studies of cooperatives in Vietnam, Germany and the Philippines
illustrate their role as member-based and member-promoted entities. Instead, Indian cooperatives
have historically been promoted by the government, which has supported the movement through
policies, refinance and capital, often becoming a shareholder in cooperatives. This involvement by
the government has resulted in political interference (promoting other agendas at the cost of the
cooperatives’ sustainability) and in the lack of a sense of ownership by the cooperative members.
Further, government-announced loan waivers have hampered credit discipline, and frequent
mergers and reorganizations of cooperatives by government authorities have transformed
cooperatives into involuntary creatures – instruments of government for the public good rather than
self-help organizations for the benefit of their members.
While the Indian government’s high-level involvement in cooperatives has disadvantaged them, a
case study of the cooperative movement in Haiti shows that the opposite side of the spectrum– no
government intervention– is also dangerous. In this case, the government ignored suspicious
fraudulent practices, leading to the collapse of the movement in 2002, affecting the credibility of the
sector and leading to the loss of low-income depositors’ savings. It is clear that the government
should take a regulatory and supervisory role while members should manage the cooperatives’
operations.
The learnings from international experiences have been crystallized in various studies, leading to
internationally-accepted cooperative principles. These include: (a) Memberships should be open and
voluntary. (b) Credit Unions that are largely self-managed are more successful and exhibit attention
to member interests. (c) Cooperatives should be democratic institutions, controlled by the members,
and should form their own policies. (d) Members should contribute equitably to the capital of the
cooperative, as the capital is the common property of the members. (e) Education, training and
information should be provided to the members, as that will help them make greater contributions
towards the development of cooperatives. (f) Cooperation at the local, regional, national and
international levels strengthens the entire cooperative movement. (g) Finally, cooperatives should
work towards the sustainable development of their communities.
In India, significant changes have taken place over the past decade. The first breakthrough in the
reform of cooperative legislation came from the Andhra Pradesh Legislature in 1995, with the
passing of the AP Mutually Aided Cooperative Societies Act, 1995. The law allowed for greater
autonomy of cooperatives and no financial support from the State for those cooperatives registered
under this new act. Other states soon followed with similarly liberal laws. Further, the RBI and
NABARD Expert Committees recognized and provided recommendations to simplify the complex and
often conflicting regulations at the state and federal levels. Nevertheless, despite these
improvements, cooperatives are still plagued with numerous challenges and issues: a lot of ground
8
must still be covered to allow cooperatives to become fully autonomous and sustainable
organizations.
An overview of the state of the cooperative sector reveals that the institutional arrangement of
cooperatives in India is complex and creates several problems. The cooperative system is divided
into rural and urban cooperatives. In most states, the former is further divided into the Short-Term
Cooperative Credit Structure (ST CCS) and the Long-Term Cooperative Credit Structure (LT CCS). With
some exceptions in a few states, the ST CCS is further divided into three tiers: primary agricultural
credit cooperative societies (PACS) with farmers as their members at the base; district central
cooperative banks (DCCBs) as the intermediate federal structure with PACS as principal affiliated
members; and the state cooperative bank (SCB) at the apex in the state with DCCBs and other
cooperatives as its principal members. In contrast to the rural federated structure, the urban
cooperatives, popularly known as Urban Cooperative Banks (UCBs), operate independently. This
system presents several problems to the sector. Firstly, the frequent competition between the tiers
defeats the purpose of greater economies of scale with higher tiers providing wholesale services to
lower tiers. The tiers are also redundant, increasing the transaction costs, and reducing efficiency
and margins. Further, the distinction between urban and rural cooperatives is often blurred and the
different regulatory treatments they receive only hinder fair competition.
In India, various international, national and state-level organizations are involved in supporting
financial cooperatives. These include the International Cooperative Alliance (ICA), the World Council
of Credit Unions (WOCCU), the National Cooperative Union of India (NCUI), the National Federation
of State Cooperative Banks (NAFSCOB), the National Federation of Urban Cooperative Banks &
Credit Societies (NAFCUB), the National Cooperative Agriculture and Rural Development Banks’
Federation Ltd (NCARDB), and various training institutes, among other organizations. Various funds
supporting cooperatives are the following: the Financial Inclusion Fund (FIF), the Financial Inclusion
Technology Fund (FITF), the Rural Infrastructure Development Fund (RIDF) and the Stabilization
Fund.
The current outreach and volume of operations of cooperatives is phenomenal – the overall
percentage of villages covered by PACS is 96% and provided agricultural credit to 3.09 crore farmers
during 2011-12. Nevertheless the financial health of cooperatives is alarming – the percentage of
PACS in profit is only 53% and the percentage of overdues to demand is about 25% for PACS and
20% for DCCBs. Also perturbing is the variability of these figures across states – for example, in
Haryana and Manipur the percentage of PACS in profit is below 15%. An overview of the data and of
government policies also indicates that the government’s financial involvement continues to be
large – 90% of SCBs’ borrowings comes from the government and paid-up capital from the
government constitutes 25% of all paid-up capital for SCBs, though this number varies widely across
states.
The poor financial health of cooperatives can be attributed to various challenges faced by
cooperatives. These include: poor governance, imprudent loan pricing (with the interest rate spread
being too low or negative), lack of professionalism, poor credit discipline among borrowers,
inadequate internal control and audit, loss of clientele because of the inability to keep pace with
time, duality of control by federal and state governments, excessive government control, and high
dependence on external funding.
The major products of financial cooperatives are demand deposits and loans, primarily related to
agriculture. However, many highly successful cooperatives, particularly urban cooperatives, have
introduced a wide range of products and services. Many large cooperative banks also engage in
income-generating activities that prove to be income-earning sources for the cooperative, buffering
9
the bottom line of the cooperatives. The more broad-based a cooperative, the more likely it is to
meet the diverse needs of members.
The rationale for cooperative regulation is strong. As participants in other financial systems,
borrowers and depositors of cooperatives need protection: the depositors need an assurance of the
safety of their deposits, and borrowers need to have loan products and lending and recovery
practices that are fair and non-exploitative. Further, cooperatives are of particular importance to
financial inclusion because they reach low- to middle-income individuals and enterprises.
The regulation of cooperatives in India is complex and sometimes conflicting. The cooperative banks
come under the purview of both the registrar of cooperative societies of the state (in which they are
located) and the Reserve Bank of India. Critics of the sector believe that this dual regulation creates
inefficiencies, and at the same time prevents prompt regulatory action.
The laws that apply to cooperatives include:
• The relevant state’s cooperatives acts. In India, states have the jurisdiction to enact laws
relating to cooperatives. As most state governments invested share capital in cooperatives, they
also sought to take control of the management of cooperatives. The increased state control led
to the passing to the self-reliant cooperatives acts in many states.
• The Self-Reliant Cooperative Society Acts/ Mutually Aided Cooperative Society Act (MACS). In
some states, this act replaces the traditional act while in others it runs concurrently, giving the
option to eligible cooperatives to register under either act. The self-reliant cooperative act has
been promulgated in nine states (Andhra Pradesh, Karnataka, Madhya Pradesh, Bihar,
Jharkhand, Odisha, Chhattisgarh, Jammu and Kashmir and Uttarakhand.
• The Constitution (97th Amendment) Act, 2011 aims to standardize some systems and increase
the democratic functioning of cooperatives. The Centre has asked state governments to amend
their respective State Cooperative Society Act so that it is in tune with the Constitution (97th
Amendment), 2011 before February 2013. Some states have not yet complied with this request
and further, others face implementation issues.
• The Multi-State Cooperative Societies Act, 2002 (MSCSA) regulates cooperatives that operate in
multiple states. While the 2002 amendment largely improves upon the earlier MSCSA to provide
greater freedom from state control to the members of cooperatives, it is still wanting.
• The Banking Regulation Act, 1949 was extended to cooperative banks from 1 March 1966,
placing cooperatives’ banking activities under the purview of the RBI.
• The Deposit Insurance and Credit Guarantee Corporation Act, 1961. The deposits made in
eligible cooperative banks are protected by The Deposit Insurance and Credit Guarantee
Corporation (DICGC), an organization set up in 1961 by the RBI. This act does not extend to
PACS, which are considered societies rather than banks.
Regulatory gaps include overlapping regulation, deficient supervision and excessive control from the
government. Several writers on the cooperative sector have made recommendations for
streamlining and strengthening regulations. Some regulations are not consistent with others, and
this report provides a compilation of the recommendations, stating the apparently contradictory
ones as well. Broadly, the recommendations are the following: remove overlapping regulation,
strengthen the state-level supervision structure, improve transparency, create access to the Credit
Bureau, improve accountability, improve management, integrate cooperatives with markets, ensure
effective member control and maintain oversight of cooperatives with the RBI and NABARD.
Internationally, financial inclusion, in which cooperatives play an important role, has gained currency
as an important element of social and economic inclusion. According to the World Bank’s Global
10
Financial Development Report 2014, “Research—both theoretical and empirical—suggests that
financial inclusion is important for development and poverty reduction.” In India, financial inclusion
has been considered a critical policy goal. The current Director of the Reserve bank of India has said:
“The imperative for financial inclusion is both a moral one as well as one based on economic
efficiency. Should we not give everyone that is capable the tools and resources to better themselves,
and in doing so, better the country?”1
To improve financial inclusion, the RBI has undertaken various policy initiatives, including: relaxed
and simplified KYC norms, simplified branch authorization policy, compulsory requirements for
opening branches in un-banked villages, the setting up of intermediate brick and mortar structures,
mandated financial inclusion plans for private sector banks, and revised guidelines for financial
literacy centres. In August 2014, Prime Minister Narendra Modi announced the Pradhan Mantri Jan
Dhan Yojana Scheme2, aiming to enrol 7.5 crore households to open bank accounts. Under the
scheme, account holders receive accidental insurance and can avail of 5,000 overdraft (after six
months) from the bank. The programme has also introduced new technology that allows people to
transfer funds and check balances through a normal phone (earlier, this function was limited to
smart phones only.)
Despite the efforts to promote financial inclusion in India, the size of the unbanked population is
staggering. As the table below shows, only 35% of the population above 15 years of age has an
account at a formal financial institution. By contrast, in China the number stands at 64% and in
Germany, at 98%. The difference between female and overall accounts is also large in India, with
only 26% of females having an account (as compared to 35% for the overall population). This
difference is smaller in China, where 60% of females have bank accounts as compared to 63% for the
overall population. In Germany, this difference is non-existent.
Cooperatives play a vital role in the delivery of credit to rural areas. Although cooperatives provide
only 16% of agriculture credit, they have a much higher penetration, evidenced by the high share of
cooperatives in total number of agricultural accounts held by the banking system. Cooperatives
provided agricultural credit to 3.09 crore farmers during 2011-12 compared to only 2.55 crore
farmers served by commercial banks and 82 lakh by the RRBs. Further, the outreach of cooperatives
has increased, as they financed 67 lakh new farmers during 2011-12 compared to 21 lakh new
farmers served by commercial banks and only 9 lakh new farmers by RRBs.3
Cooperatives also have some key advantages over other institutions in promoting financial inclusion.
Firstly, by being interwoven with communities, they have superior knowledge regarding borrower
quality and business opportunities. This feature is particularly useful in an environment lacking
sophisticated credit scoring. They also have a lower cost structure allowing them to reach segments
of the population that are unprofitable for other banks. Further, the cooperative can balance
profitability with the development needs of the community, given that the owners are also members
of the community in which the cooperative operates. Overall then, cooperatives can address market
imperfections (such as informational asymmetries, transactions costs and contract enforcement
costs), which are particularly binding on poor or small entrepreneurs who lack collateral, credit
histories and connections.
An overview of Indian financial cooperatives exposes the lack of consistent and reliable centralized
data and the need to improve the regulatory environment in which cooperatives operate.
Cooperatives can be strengthened by developing (even outsourcing the development of)
1 Rajain, 2013
2 GoI, 2014
3 RBI, 2013, pages 10-11.
11
sophisticated products and services. Finally, in order for there to be financial inclusion, there needs
to be a focus on individuals rather than households, and gender-disaggregated information on bank
accounts need to be monitored. Civil society needs to take a greater interest in cooperatives in
order for them to be able to continue to provide agricultural and rural finance to small holders and
landless and excluded people, and for these people to be a part of the larger financial system.
12
1 Introduction
Financial cooperatives are important players in the world banking system, which reach the poorest
people and have a substantial economic impact. They serve over 857 million people worldwide,
including 78 million living on less than $2 a day, and represent 23 per cent of all bank branches.
Financial cooperatives include cooperative banks (based mainly in Europe) and credit unions (set up
originally in North America and developing countries), as well as banks owned by agricultural or
consumer cooperatives. In Europe, there are 4,000 cooperative banks active in 20 countries, with 50
million members, 780,000 employees, $5.93 billion in assets and an average market share of 20 per
cent. There are over 51,000 credit unions that operate in 100 countries, with 196 million members
and $1.56 billion in assets.
It is a fact that financial cooperatives were the first microfinance institutions in the world. Today’s
financial cooperatives that include credit unions, thrift and credit cooperatives, primary agriculture
credit cooperatives (PACS), rural and urban cooperative banks, etc., are in one way or another based
on the lessons drawn from well-known models promoted by Raiffeisen, Shultze–Delitzsch, Dr.
Wollemborg, and Desjardins and Rochdale pioneers. In the context of inclusive development,
cooperatives are critical institutions for both social and financial inclusion. Whereas social inclusion
is addressed by sub-sectoral and service cooperatives, savings and credit cooperatives function as
intermediaries of inclusive finance. Cooperatives play a significant role globally in the provision of
microfinance services to the poor, an example being the Rabo bank, which is also recognized as one
of the world’s safest banks. Further, cooperatives are known to be resilient financial service
organizations in times of crisis, and they remain financially sound and trusted.4
A recent report on financial inclusion in India says that the cooperative movement was the first
effort towards financial inclusion.5 The Indian financial cooperative system is also the largest in the
world, in terms of the number of people served; it serves about 270 to 390 million people.6 Although
the cooperative sector has been plagued by problems leading to failure of some cooperatives, there
have been sweeping changes in the regulations, which have provided for greater standardization of
systems and improved oversight, while also safeguarding the democratic processes within
cooperatives. There has also been experimentation with new types of financial cooperatives,
including the Self Reliant Cooperatives (SRCs) and Farmers’ Producer Organizations (FPOs). These
organizations exist, however, in a confusing regulatory environment, where the SRCs are
marginalized by the traditional cooperatives now re-engineered under the 97th
Constitutional
Amendment, and the FPOs are collectives that operate under the Companies Act but with a
cooperative philosophy.
The state of the current enabling environment for cooperatives has been discussed in recent forums,
including the Microfinance India Submit 2013 and the United Nation Development Programme’s
(UNDP’s) knowledge sharing forum on microfinance, the Microfinance Community of UN Solutions
Exchange, where members highlighted the need to carry out an in-depth study of financial
cooperatives in India. A subsequent e-discussion helped to develop the detailed Terms of Reference
(TOR) for the study. The study is intended to analyse the current regulations and identify the
regulatory gaps that need to be improved in order to enable the financial cooperatives to contribute
significantly to the financial inclusion agenda. The study will also document the work of successful
financial cooperatives. The UNDP has commissioned the study of financial cooperatives in the
4 ILO, 2013
5 CRISIL, 2014
6 Grace, 2008
13
context of financial inclusion (FI) in India, and after a rigorous tendering process, assigned the
investigation to Sampark.
The first part of the investigation involves a review of the enabling environment for cooperatives in
India. This includes a brief overview of the international experience of cooperatives and a history of
cooperatives in India. The current state of the cooperatives sector in India is also captured in a short
section.
As part of the phase 1 study, Sampark has conducted an in-depth macro-level review, which includes
an overview of the cooperatives movement, the international experience of cooperatives and its
relevance to the Indian context, the role of financial cooperatives in financial inclusion, a listing of
the different organizations involved in promoting these cooperatives, and remarks on the way
forward and how we can conducive and enabling environments for these cooperatives. This has
been done by undertaking desk research, interviewing key experts, and contacting various
organizations through emails in order to source data.
Considering the complexity of the cooperative network and its experiences, it has only been possible
to do a limited overview in the first six weeks of the assignment. The team will continue to build on
this as it moves into the next phase of field-level study.
1.1 Defining Financial Cooperatives
The world of cooperatives is diverse, consisting of a wide range of cooperatives, from financial and
agricultural to commodity and services cooperatives. As a member-based institution, a cooperative
is defined as follows:
“A co-operative is an autonomous association of persons united voluntarily to meet their common
economic, social, and cultural needs and aspirations through a jointly-owned and democratically-
controlled enterprise.”7
This report refers specifically to financial cooperatives, which are cooperatives that offer financial
services, sometimes among other services. Financial cooperatives are called by various names
around the world, including credit unions, credit cooperatives, cooperative banks or societies.
Financial cooperatives are significantly different from other types of financial institutions. The World
Council of Credit Unions (WOCCU) uses the following table to distinguish financial cooperatives from
other financial institutions.8
7 ICA, n.d.
8 WOCCU, n.d.
Table 1: Financial Cooperatives vs. Other Financial Institutions
Financial Cooperative Commercial Bank Other Microfinance
Institutions (MFIs)
Structure Not-for-profit, member-owned financial
cooperatives funded largely by voluntary member
deposits.
For-profit institutions owned by
stockholders.
Institutions typically
funded by external loans,
grants and/or investors.
Clientele
Members share a common bond, such as where
they live, work or worship. Service to the poor is
blended with service to a broader spectrum of the
population, which allows credit unions to offer
competitive rates and fees.
Typically serve middle-to-high
income clients. No restrictions
on clientele.
Target low-income
members/clients, mostly
women, who belong to the
same community.
Governance
Credit union members elect a volunteer board of
directors from their membership. Members each
have one vote in board elections, regardless of
their amount of savings or shares in the credit
union.
Stockholders vote for a paid
board of directors who may not
be from the community or use
the bank's services. Votes are
weighted based on the amount
of stock owned.
Institutions are run by an
appointed board of
directors or salaried staff.
Earnings
Net income is applied to lower interest on loans,
higher interest on savings or new product and
service development.
Stockholders receive a pro-rata
share of profits.
Net income builds reserves
or is divided among
investors.
Products &
Services
Full range of financial services, primarily savings,
credit, remittances and insurance.
Full range of financial services,
including investment
opportunities.
Focus on microcredit.
Some MFIs offer savings
products and remittance
services.
Service Delivery Main office, shared branching, ATMs, POS devices,
PDAs, cell phones, Internet.
Main office, shared branching,
ATMs, POS devices, PDAs, cell
phones, Internet.
Regular visits to the
community group.
Source: WOCCU website
The financial cooperative, like other types of cooperatives, is a member-based organization. This
feature shapes its identity and the role, affecting all other features: clientele, governance, earnings,
products and services, and service delivery.
While the above table offers an international perspective, there are some differences across
countries. In India, cooperatives are for-profit ventures and are tax-paying entities. The member-
owned nature of cooperatives is diluted in the case of many cooperatives in India, where in the early
years of their proliferation, cooperatives received an initial injection of share capital from state
governments. Not all Indian cooperatives are well provided for and many primary-level cooperatives
do not have access to infrastructure facilities. While governance principles are the same across the
world, the implementation of these varies. The Indian experience has been discussed in the chapter
on cooperative regulations.
2 Experiences of Cooperatives
This section aims to present a brief summary of the development of cooperatives, internationally
and in India.
2.1 International Experience
The cooperative model dates back to early civilizations in Egypt and China around 1,500-1,300 B.C.
Around 550 B.C., agricultural products were exchanged and sold through cooperatives in Babylonia.
These cooperatives also provided loans to the poor to avoid exploitation by informal moneylenders.
The origin of the modern cooperative model lies in the United Kingdom and Germany in the first part
of the 19th century.9
2.1.1 Origins of the Cooperative Movement
Financial cooperatives can be traced back to the agricultural credit cooperatives in Germany under
Friedrich Wilhelm Raiffeisen (1818–1888). During the Industrial Revolution, many farmers and
artisans faced the negative effects of the liberation of the serfs and the introduction of free trade.
These farmers and artisans were burdened by having to pay off their former lords and were
inexperienced in the independent management of a business. The failure of harvests in the years
1846-47led Raiffeisen, the mayor of Weyerbusch, to create a self-help organization whose wealthier
members provided money at the time of crisis and its poorer members repaid the amount borrowed
on low interest rates.10 Over the years the importance of cooperatives worldwide has increased so
much that there are currently 57,000 credit unions in 103 countries that serve 208 million people (as
of 2013).11 The United Nations even named 2012 as the International Year of Cooperatives.12
On a global scale, the penetration rate of credit unions is about 8%. The highest penetration rate is
found in St. Vincent & the Grenadines (90%), followed by Barbados (78%) and Ireland (75%). The
penetration rates are high in the U.S.A. and Canada (around 45%), yet they retain a small percentage
of deposits. U.S. credit unions have a deposit market share of almost 7% and around 100 million
members. In Canada, credit unions have a deposit market share of 8% and more than 10 million
members. The penetration rate in Latin America is more than 8%, but the deposit share levels trail
9Groeneveld, 2015
10Sudradjat, n.d.
11WOCCU, 2014
12WOCCU, 2011
16
behind significantly at around 3-4%. However, they are much more significant that these market
shares suggest, because many credit unions reach down to some of the poorest people in each
country and have a substantial economic impact.13
2.1.2 Experiences of Success and Failure
Financial cooperatives perform quite differently from banks, which is evident from their success
stories. During the Recession in 2008-9, while the US banking industry was on the brink of a
collapse, cooperative financial institutions survived as they take on less risk, tended to be less
affected by the business cycles, and therefore, could serve as an important counter-cyclical
economic force in local markets. When banking institutions pulled back significantly on lending
after the recession, credit unions filled the void and their loans grew by 8% during the height of the
financial crisis, while bank loan portfolios declined by nearly 10% during the period. Similarly, credit
unions have expanded their business lending in 2009-13, while small business lending by other
banks has significantly declined.14
Some historical and recent cases of cooperatives are presented
below.
The Réseau des Caisses Populaires du Burkina, Burkina Faso
Burkina Faso is one of the world’s poorest countries with nearly 88% of the active population
engaged in the agro-pastoral sector. The economic infrastructure is extremely poor and the formal
banking sector is concentrated primarily in the urban areas. In this environment, the Réseau des
Caisses Populaires du Burkina (RCPB), the country’s largest financial cooperative network, has
helped people in rural areas access financial services. It is one of the largest cooperatives in West
Africa and it owns a large share of the outlets of financial cooperatives. The RCPB is organized in
three tiers: the primary caisses populaires (the francophone equivalent of credit unions) at the
grassroots level, regional unions, and a national federation. In places where cooperatives are not
economically viable, some caisses populaires have established smaller branches called Points of
Service (POS).15
The success of the RCPB can be traced to some key strategies:
1. The RCPB offers a wide range of products and it even tailors products to suit the specialized
needs of the farmers, traders, herders and salaried people.
2. It employs innovative credit technologies. For example, Centre Financier aux Entrepreneurs
(CFE) is a professional consulting group, which was formed due to the caisses’ inability to
evaluate large business loans. Now, the caisses disburse the loan on approval of the CFE, which
possesses the technical knowledge to assess the viability of large loans.
3. The regional unions and national federation also provide necessary support services.
(i) There is periodic supervision and inspection of the caisses populaires.
(ii) Cooperative training, education, and materials are provided to the caisses.
(iii) Research is carried out to identify the problems and opportunities that the organization
might encounter, and policies and plans are formulated accordingly.
13
Groeneveld, Ibid. 14
Schenk, 2012 15
Aeschliman, 2007
17
Cooperatives Dix Pourcent and Le Levier, Haiti
According to World Bank estimates, 80% of the people of Haiti lacked access to credit in which year?
Commercial banks lent less than 2% to the agricultural sector and even MFIs devoted only 4.5% of
total lending to loans for agricultural production. It is in this scenario, between 1998 and 2002, that
the cooperatives dix pourcent flourished. They relied on a steady stream of new clients and drug
money to operate, and paid interest rates between 10 to 15%. The high interest rates, compared to
commercial banks that paid up to 2%, and prizes like cell phones and CD players ensured their
tremendous popularity. Naturally, a model like this is not sustainable and the cooperatives dix
pourcent collapsed in 2002, affecting the credibility of the entire cooperative movement and leading
to the loss of $200 million of investors’ money.
Meanwhile, Développement International Desjardins (DID), the international development arm of
the Canadian cooperative Desjardins Group, had helped its partner caisses populaires in Haiti to
become viable institutions and had created an auto-regulatory association that provided financial
oversight for the member caisses. But after the “dix douze” scandal (as the collapse of the dix
pourcent cooperatives was termed by the media), Haitians lost faith in the entire cooperative
movement, including in the caisses. This crisis ultimately led the Haitian government to intervene
and in June 2002, the cooperative sector was brought under the control of the Central Bank, which
had the power to audit the cooperatives and shut them down if necessary.
After the crisis, DID worked on a plan to strengthen the cooperatives, which were small and could
not diversify their portfolios. DID oversaw the formation of a federation of fourteen caisses, called Le
Levier. The federation performed well till the earthquake hit the country in 2010. At this time, the
entire cooperative network was in trouble again. The caisses were either destroyed or looted.
International organizations pledged $1 million to help Le Levier meet the deposit liabilities. After
2010, Le Levier recovered considerably with the help of its international partners. These partners
helped Le Levier to develop new products, expand into new markets and gain the trust of the Haitian
people. However, there is a concern that if the cooperatives continue to require external funding in
the long run, the project will not be sustainable.16
The People’s Credit Funds, Vietnam
The People’s Credit Funds (PCFs) in Vietnam is a successful and resilient network of local financial
institutions. The PCFs are self-managed and financed, but are part of a bigger movement controlled
by State Bank of Vietnam, the country’s central bank. The SBV prepared the regulatory framework,
integrated the network into the formal financial sector, supervised its progress and enforced
prudential standards.17
At the highest level of the network is the Central People’s Credit Fund , which
manages liquidity exchange for the PCFs and also provides financial services to the public (mostly
urban) to ensure viability. Some of the features of the system are as follows:
1. Three types of supervision are carried out in PCFs: daily internal control, random but regular
inspections by the SBV, and remote supervision by the SBV.
2. Training programs are carried out free of charge.
3. A regulatory framework is made for the PCBs 18and they are licensed by the SBV.
4. To ensure sustainability, the SBV closes any non-performing PCFs.
The two-tier system of PCBs and the CCF limited the impact of the global financial crisis in Vietnam.
To some extent, the CCF is vulnerable to fluctuations in the global economy due to its exposure to
urban credit. However, the PCFs, which serve the rural areas, were not affected by global dynamics.
Thus savings-based self-reliance ensures resilience to the global cycles.
16
Mattern and Wilson, 2013 17
Seibel and Thac, 2012 18
The English name of PCB translates to: Vietnam Credit Information Joint Stock Company
18
Cooperatives in Germany
Germany also has a thriving network of cooperatives. It has around 16 million members and it is
estimated that nearly every farmer, winegrower and gardener is part of at least one cooperative.
The German cooperative network is also three-tiered. Cooperative banks function at the local level,
followed by apex banks at the regional level. Apex banks are aided by a number of specialized
groups, which provide the required technical expertise. At the national level, there are four
specialized federations and many national centres and institutes. Among the many functions of the
national federations, there is provision of accounting, auditing and advice on legal, tax and human
resources matters. The federations also support the network on international platforms and
exchange information with other cooperatives around the world.19
The Cooperative Rural Bank of Bulacan, Philippines
The Cooperative Rural Bank of Bulacan, Inc. (CRBBI) in Philippines is a rural bank controlled by 180
primary organizations. The CRBBI lends to it member organizations, which in turn lend to individual
clients. The primary achievement of the CRBBI is that it attained a hundred percent operational self-
sufficiency in 1997. This implies that its income from interest and fees on loans fully covered its
operating costs and provisions for losses.20
Even though this implies an increase in the cost of loans,
it ensures that the bank is on the path of long-term sustainability. Some of the factors that improve
viability are members’ participation in ownership and governance, forward-looking professional
management, the adoption of a market-oriented interest rate, incentives for excellence and
penalties for bad performance, lesser dependence on government-directed credit programmes, and
diversification of deposit products to suit the needs of the local population.
2.1.3 Lessons Arising from the International Experience of Cooperation
International experiments and experiences with cooperatives have taught the movement a few
lessons. Studies on cooperative movements around the world have attempted to distil the learnings
into a few principles that can be integrated with the existing social, political and economic
environments.
Adherence to Cooperative Principles
The international experience validates the need to adhere rigorously to the following cooperative
principles, laid down by the International Co-operative Alliance21:
(a) The first principle of cooperatives dictates that “memberships should be open and
voluntary”.
(b) Credit Unions which are largely self-managed are more successful and exhibit attention to
member interests.
(c) They should be democratic institutions controlled by the members and should form their
own policies.
(d) Members should contribute equitably to the capital of the cooperatives so that the capital is
the common property of the members.
(e) Education, training and information should be provided to members as that will help them
make greater contributions towards the development of the cooperatives.
(f) Cooperation at the local, regional, national and international levels strengthens the entire
cooperative movement.
(g) Finally, cooperatives should work towards the sustainable development of their
communities.
19
Sudradjat, Ibid. 20
Quiñones, 1999 21
ICA, Ibid.
19
Role of the government
The discourse on international cooperatives holds that the government should play the role of a
legislator, regulator and prudential supervisor, and not interfere in management. However, there is
also evidence that leaders of cooperatives have jeopardized members’ interests in many cases and
so, regulation needs to be strong. Further, it is important that the government agency that regulates
the credit unions be trained in their nature, risks and methodologies.
The main models of supervision are as follows:
(a) Direct supervision of all the credit unions by the government. This removes regulatory
arbitrage, promotes greater confidence and results in uniform standards of competition in
the market. But in a country with thousands of cooperatives, it results in a huge cost to the
government.
(b) Supervision differentiated by size of cooperatives: Direct supervision of the largest
credit unions based on asset size. The smaller unions are supervised by mortgage brokers, or
insurance and money transfer firms. This reduces the costs to the government. But it creates
regulatory arbitrage, divides the credit market into two, and creates confusion among the
depositors.
(c) Delegated supervision: The supervision is assigned to a third party (like the Credit
Unions’ National Association in the United States, for instance). The cost of supervision is
avoided by the government, and the unions and government share a better relationship.
(d) Supervision by restructured ministries of governments: Most such ministries are
involved inthe welfare of many types of cooperatives, not just financial ones. As a result,
they lack adequate funding and the required technical expertise.
Laws and Regulations
Laws relating to cooperatives have traditionally provided more flexibility because these
organizations are expected to be managed and controlled by members. International experience
shows that it is important to build a robust legislation, which is prudential, proportional and
predictable. The legislation structures should be different for the banking, cooperative and
microfinance laws. The law should define the minimum requirements for licensing a credit union; for
the constituents, powers and activities of a union; for a supervisory body; and for deposit and loan
concentration limits.
Further, international experience on cooperatives’ regulations shows that the focus on initial start-
up requirements needs to be replaced or supplemented by measures that ensure the commitment
of members (such as getting a minimum number of signatures from people committing their
membership, developing business plans to show viability, and allowing a grace period to reach
capital adequacy). In addition to members’ shares, the capital base of cooperatives needs to be
broadened to include retained earnings, donations and statutory reserves. The regulators should
allow for non-traditional collateral and alternative guarantees for small loans. The high cost of
tending to a large number of small depositors should also be considered.22
22
World Bank, 2007; Poprawa, 2009; WOCCU, 2008
20
2.2 History of Financial Cooperatives in India
The history of cooperatives in India can be divided into “four phases representing significant
developments or events in the history of the co-op movement”.23
The First Phase: 1900-193024
In 1904, the State of India passed the first legislation concerning cooperatives, namely, the
Cooperative Societies Act. Cooperative credit societies were set up with the objective of providing
credit to farmers at a reasonable rate25
.Until then, only a few cooperatives had taken form; the first
was established in 1891 for farmers to have collective control over the common lands/pastures of
the village.26 Cooperatives proliferated quickly after the 1904 act. By 1915, more than 800 primary
cooperatives were established all over India.
In this phase, the Government set up three different committees to investigate the functioning of
financial cooperatives. The first was the Edward Law Committee, which came up with? the
legislation. Subsequently, a study by Frederic Nicholson confirmed and reiterated the need for the
State to actively promote cooperatives. In the year 1915, the Maclagan Committee advocated that
there should be one cooperative for every village and every village should be covered by a
cooperative. By this time, the State was already deeply involved in promoting financial cooperatives
as instruments of credit delivery. In 1928, the Royal Commission on Agriculture in India submitted its
report. Amongst its various observations, the Commission suggested that the cooperative
movement must continue to be directed toward the expansion of rural credit and that the State
should patronize cooperatives and protect the sector. It was the Royal commission, which made the
observation that “if co-operation fails, there will fail the best hope of Rural India.”27
The early interventionist role of the State shaped the cooperative structure that we have today,
including the system of refinance, developed initially by the Agriculture refinance cell of the Reserve
Bank of India, then the Agriculture Refinance and Development Corporation and later by the
National Bank for Agriculture and Rural Development (NABARD). The trend of involvement
continued in the following phases, as the State became increasingly involved with cooperatives,
seeing them as instruments delivering Government schemes.
The Second Phase: 1930 – 1950
This phase did not involve too much action for the financial cooperatives. The early signs of sickness
in the cooperative system also surfaced during this period.
The 1945 Agricultural Finance Sub-committee observed that a large number of co-ops were faced
with the problem of frozen assets as a result of heavy overdues. As a result, it recommended the
liquidation of members’ frozen assets by adjusting the claims of the society to the members’
repaying capacity. This solution is another indicator of the State’s interventionist role, this time in
the area of the credit discipline of members.
Around the same time there was another committee set up to look into the cooperative sector,
namely, The Co-operative Planning Committee. The Committee looked into the causes of co-op
failure and identified the small size of the primary co-op as the principal cause of failure. It also
advocated State protection for the co-op sector from competition.
23
Sriram, 1999 24
The following outline of the four phases of the Indian cooperative movement is largely based on M. S. Sriram’s study. 25
RBI, 2013 26
Hough, 1960 27
RCA, 1979
21
The Third Phase: 1950–1990
The third phase was action-packed. The All India Rural Credit Survey (AIRCS) submitted its report in
1954, recommending the participation of the Sate in the share capital of the cooperatives. It
suggested that the State should hold at least 51% of the share capital of all cooperatives at all levels.
Significantly, it also recommended that “there should be a common cadre of employees for all co-
ops, the co-ops should have both credit and commodity functions, the co-ops should have a larger
area of operation and to ensure this, there had to be compulsory amalgamation of co-ops”.28
In
1969, another committee was set up to review the progress made on the recommendation of the
AIRCS.
Ever since the AIRCS recommendations, the State has been involved in restructuring the cooperative
sector, ignoring the basic issues of autonomy and self-help. As M. S. Sriram says in his study,
“The view of the State has been that
the rural areas need to be supported
with cheap credit from the State and if
the institutions that were meant to
deliver this failed, there either had to
be a re-organization or a new
institution created. In brief, it initiated
more studies and took more policy
decisions.”
The subsequent committees illustrate
the diversity of policy
recommendations. The Narasimham
Committee suggested floating
Regional Rural Banks; the Hazari
Committee recommended integration
of the short-term structure with the
long-term (though not implemented);the National Commission on Agriculture
recommended setting up of Farmers’ Service Co-operative Societies, this time with the
active collaboration of the nationalised banks; the Bawa committee recommended the
setting up of large co-ops in tribal areas; and the Committee to Review Arrangements for
Institutional Credit for Agriculture and Rural Development, under the Chairmanship of
Sivaraman, resulted in the formation of NABARD.
The diversity in the committee’s recommendations resulted in many interventions at the
policy level too. Additionally, the financial involvement of the State caused interference at
the operation level as well, leading to what is termed as dependence trap, as depicted in
Figure 1.T he ailing financial cooperative system received a decisive blow when, in 1989,
the Government of India (GoI) launched a populist scheme to write off the loans of
farmers—an election promise on which the government had come to power.
Toward the end of this phase, however, some alternative viewpoints were put forth. The
Khusro Committee talked about ‘savings as product necessary for cooperatives’ and
advised that ‘business planning should take place at the local level and that strategies
should be in place for cooperatives to sustain themselves.’29
28
Sriram, Ibid; 4. 29
Sriram, Ibid.
Figure 1: Dependence Trap
22
The Fourth Phase: 1990–Present
This phase saw some developments in the area of the autonomy and self-reliance of cooperatives.
A parallel cooperative movement of Self-Help Groups (SHGs) picked up silently all over the country.
Strikingly, while these groups “operate on the basic principles of cooperation and mutual aid as
specified by International Co-op Alliance in its 1994 congress, very few registered themselves as
cooperatives. [Several of these enterprises] operate as informal groups with just a bank account and
some bookkeeping.”30
) The government monitored this movement and played a cautious but
supportive role.
In the mainstream cooperative movement, an important development took place when the Brahm
Prakash Committee on the Model Co-op Act “suggested a radically different law which ensured
autonomy to co-ops in the country, thereby suggesting that the role of the State should be reduced
in the co-op sector.”31
However, given that cooperation is a State subject, it was only
recommendatory in nature. Nevertheless, in 1995, the state of Andhra Pradesh passed a radically
new law called the Andhra Pradesh Mutually Aided Co-operative Societies Act to govern new-
generation co-ops. The new act runs concurrently with the old Act of 1956, allowing existing
cooperatives a choice between the two. It allows cooperatives registered under it greater autonomy
at the cost of no financial support coming from the States. Several informal mutual-aid groups have
come forward to register under the new act. As of February 2005, there were a total of 13,891
cooperatives registered under this act, of which 3,428 were previously registered under the old act.
Following the example of Andhra Pradesh, several states introduced self-reliant cooperative laws,
including Jammu and Kashmir, Uttaranchal, Karnataka, Madhya Pradesh, Jharkhand, Bihar,
Chhattisgarh and Orissa.
Subsequent committees, such as the Shri Jagdish Kapoor, Shri Madhav Rao, and Prof. A.
Vaidyanathan committees echoed the new view that cooperatives should be member-driven
enterprises, free of political interference. The Vaidyanathan Committee proposed significant and
wide-ranging reforms in the governance and management of cooperatives, including crucial
amendments to the respective State Cooperative Societies Acts.32 As an incentive for reform, the GoI
developed a comprehensive assistance package, the provision of which was contingent on major
revision by the states of the legal and regulatory frameworks.33
Based on the recommendations of
the Vaidyanathan Task Force, the GoI announced a package for revival of the ST CCS in 2006. As of
December 2012, twenty-five state governments signed the Memorandum of Understanding with the
GoI and NABARD, agreeing to make amendments and receive the assistance package.
In early 2008, the Gol had announced the Agricultural Debt Waiver and Debt Relief Scheme, 2008,
despite the warning of the World Bank regarding “the potentially adverse impact debt waivers could
have on credit culture as well as the risk they posed to financial markets/institutions”.34
This scheme
has been criticized for not mitigating the debt burden of all farmers but only of those borrowing
from formal institutions and those being undertaking risky behavior.35
In essence, despite some setbacks, a new generation of autonomous financial cooperatives is slowly
emerging in India.
30
Sriram, Ibid. 31
Sriram, Ibid. 32
RBI, 2013 33
World Bank, 2014 34
World Bank, Ibid. 35
Srinivasan, 2008
23
3 State of the Cooperative Sector
3.1 Cooperative Institutional Arrangement
The cooperative system in India consists of rural and urban cooperatives. The rural cooperative
system, illustrated in Figure 2 below, consists of the Short-Term Cooperative Credit Structure (ST
CCS) and the Long-Term Cooperative Credit Structure (LT CCS).
The ST CSS is of most relevance to financial inclusion as it meets the crop loan requirements. The ST
CCS functions as a three-tier structure in 16 states. As shown in the figure, it is composed of primary
agricultural credit cooperative societies (PACS) at the base; PACS have farmers as their members.
District Central Cooperative Banks (DCCBs) act as the intermediate federal structure; PACS are its
principal affiliated members. State Cooperative Banks (SCB), at the apex state level, have the DCCBs
and other cooperatives as their principal members. In 13 smaller states and union territories, PACS
are directly affiliated to SCBs and the ST CCS functions as a two-tier structure. In three states, a
mixed structure operates, with a two-tier structure in some districts and a three-tier structure in the
others.36
The LT CSS, supporting farmer-level capital investments in agriculture, consists of two tiers, with
Primary Cooperative Agriculture and Rural Development Banks (PCARDB) at the base, and State
Cooperative Agriculture and Rural Banks (SCARB) at the apex.
Figure 2: Rural Cooperative Institutional Arrangement
36
Bakshi, 2013
RBI/ GoI
NABARD
SCBs (31)
DCCBs (370)
PACSs (92,432)
SCARBs (20)
PACRDBs (687)
Depositors and borrowers
Short- and Medium-Term Long-Term
24
NABARD provides direct finance and refinance to SCBs, SCARBs and recently, also directly to
DCCBs.37 NABARD then borrows from the Reserve Bank of India (RBI) and the GoI, among other
institutions.38
Urban Primary Cooperative Banks, popularly known as
Urban Co-operative Banks (UCBs), are primary
cooperative banks located in urban and semi-urban
areas. In contrast to the rural three-tier structure, these
operate independently although they are loosely
integrated into the higher financing agencies, such as
DCCBs and SCBs. The status of UCBs, registered under
the Multi State Cooperative Societies Act, in the
cooperative structure is not well defined. They are
neither linked to any DCCB nor SCB on account of their
presence in more than one state.39
A couple of issues with the Indian three-tier system
stand out. Firstly, the competition existing between the
tiers defeats the purpose of a multi-tier system. The
advantage of such a system would be economies of
scale, with higher tiers providing wholesale services to
lower tiers. However, in India, SCBs often serve the same
individuals and cooperatives as the DCCBs and to some extent, those that PACSs seek to serve as
well. As Dave Grace, the former vice-president of the World Council of Credit Unions (WOCCU),
pointed out in an article on the cooperative system in India, “a well developed system of trust and
support has not been and cannot be established within such a competitive environment” (2008). In
the Report of the Expert Committee to examine the Three Tier Short Term Cooperative Credit
Structure (ST CCS) (2013), the RBI also confirmed the existence of competition in deposit
mobilization between the tiers.
Additionally, the distinction between urban and rural banks has been blurred. The above-mentioned
Report of the Expert Committee has also found that some DCCBs and the SCB consistently provide
less than a 15% share of the agricultural credit in the operational area. Further, SCBs in the North-
Eastern Region as well as in smaller states and union territories like Delhi, Goa, Chandigarh, etc.
provide insignificant credit to agriculture and only cater to the requirements of the urban
population. Policymakers, then, should determine whether existing barriers need to be removed in
order to allow fair competition or whether truly re-enforcing tiers should be reinstituted.40
Another significant issue is the redundancy in the three-tier system. In the words of the above-
mentioned Report, “The prevalence of the three-tiered structure leads to an increase in transaction
costs that diminish profit margins.” The existence of a third tier at the state level is unusual outside
of India; in most countries, the third tier typically only exists at the national level.
37
NABARD, n.d. 38
Maan and Singh, 2013 39
Das,2009 40
Grace, 2008.
The three-tier structure and the
rural-urban distinction creates
several problems:
• Competition among
cooperatives at different
levels as they serve the
same clients.
• Blurred distinction between
rural and urban
cooperatives.
• Increased transaction costs
and reduced profit margins.
• Low overall efficiency of the
cooperative credit system.
25
3.2 Organizations Promoting Financial Cooperatives
Various networks at the state, national, and international levels are involved in supporting and
promoting the interests of financial cooperatives in India. These organizations are presented in
Figure 3 below, which is expanded on in Annexure 1.
The primary cooperatives (PACSs and PCARDBs) are federated into higher-tier cooperatives at the
district and state levels (this institutional arrangement is discussed in chapter 3.1). The state
cooperative network is also represented by unions, and supported by training institutes, such as the
Regional Institutes of Cooperative Management (RICMs) and Institutes of Cooperative Management
(ICMs).
At the national level, the National Co-operative Union of India (NCUI), the National Federation of
State Cooperative Banks (NAFSCOB), the National Federation of Urban Cooperative Banks & Credit
Societies (NAFCUB) and the National Cooperative Agriculture & Rural Development Banks’
Federation Ltd (NCARDB) represent member cooperatives and facilitate their operations. National
training institutes include Vaikunth Mehta National Institute of Cooperative Management
(VAMNICOM), Indian Society for Studies in Cooperation (ISSC), College of Agricultural Banking (CAB)
and Bankers Institute of Rural Development (BIRD). Finally, at the international level, the
International Cooperative Alliance (ICA) and the WOCCU represent and support the global
cooperative movement.
Figure 3: Organizations and Networks Promoting Financial Cooperatives
The national and international networks provide opportunities for advocacy and policy change.
3.3 Products and Services of Cooperatives
The major products of financial cooperatives are demand deposits and loans, both primarily related
to agriculture. However, many highly successful cooperatives, particularly urban ones, have
introduced a wide range of products and services. A broad classification of the loan products is given
in the box below.
26
Cooperatives have a wide range of savings products, and some offer locker services just like banks.
The loan products include loans for agriculture and warehousing, which taken together form the
bulk of loans given out by cooperatives. Other loans products may be developed from time to time,
based on specific needs. Cooperative banks provide other financial services such as remittances and
insurance. Many large cooperative banks engage in income-generating activities that prove to be
income-earning sources for the cooperative, buffering the bottom line of the cooperatives. With a
good balance sheet and profits, cooperative banks may start welfare and other social activities such
as elder care, etc. The more broad-based a cooperative, the more likely it is to meet the diverse
needs of its members. The most successful cooperative banks in the country, such as the Sewa
Cooperative Bank and the Buldana Cooperative, exhibit a broad base of activities, both economic
and social, that meet the needs of members. Another example is that of the Andhra Pradesh State
Cooperative Bank Limited (APCOB), which has expanded its products and services with the
assistance of the IFC, a member of the World Bank Group.4142These are also listed in Table 2.
These examples show that cooperative banks have increased the range of products and services that
they provide.
Table 2: Products and Services of Financial Cooperatives
Products of Buldana Cooperative Products of APCOB
• Savings Products
Demand deposits, fixed deposits, recurring
deposits.
• Loan Products
Crop loans, enterprise loans, gold loans, vehicle
loans, housing loans, education loans, loans
against National Savings Certificates, life
insurance policies and warehouse receipts, loans
for financing pharmaceutical production, loans
for bicycles, gas connections, solar lights or
building toilets.
• Other Financial Services
Insurance and money transfer (demand drafts,
telegraphic transfers, NEFT, RTGS).
• Non-Financial Products and Services
Senior citizen's care centre, cow shelter, road
construction, cultural and sports activities, tree
planting, village adoption, support to families of
army officers and prisoners.
• Through PACSs and DCCBs
o Agricultural production credit for
seasonal agricultural operations
(crop loans).
o Investment credit for investments in
agriculture for minor irrigation, farm
mechanization, land development,
horticulture, dairy, poultry, fisheries
and other diversified investments
and allied activities.
• Facilities to urban clientele
o Deposit schemes
o Safe deposit lockers
o Clean & Secured Overdrafts
o Consumer Durable Loans
o Vehicle Loans
o Gold Loans
o Housing Loans
o Real Estate Mortgage Loans”43
In addition to products and services, some successful cooperatives have set up businesses as well.
These involve sellingsolar lanterns; renting warehouse space, starting crop cleaning and grading
plants, mineral water plants, housing projects, clubs, guest houses, students' hostels, working
women's hostels, pharmaceutical production companies, blood banks, etc. These provide an income
for the cooperative, in addition to profits it makes from financial business.
41
Kumar, 2012 42
Andhra Pradesh is the only state in the country that integrated short-, medium- and long-term credit structures, and such
integration efforts resulted in as many advantages as disadvantages in terms of rejigging businesses and re-orienting and
aligning staff. Source: http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=697 43
Rupee Times, n.d.
27
3.4 The Current Scenario of Indian Financial Cooperatives
3.4.1 Outreach and Volume of the Operations of Cooperatives
Because PACS constitute the first tier of the ST CCS, the penetration of PACSs is of particular
relevance to the cooperatives’ role in rural finance.
As shown in Table 3 below, the number of PACSs and the number of members in PACS are significant
but varying across states. In each state, the percentage of villages reached is also considerable, with
the exception of a few states like Arunachal Pradesh, where PACSs only reach about 13% of the
villages. Overall, in India, the percentage of villages covered by PACSs is 96% of the total number of
villages, indicating high rural penetration.
The average loan size of PACS is small— 27,40544
per account, implying that the average borrower
is of low- to middle-income. The amount varies widely between 1,000 in Jammu and Kashmir to
over 60,500 in PunjabI.
About 48% of the total loans outstanding with PACSs are for agriculture, although this number is
highly variable as shown in the aforementioned table. Overall, cooperatives only provide 17% of
agricultural credit, with commercial banks providing 72% and Regional Rural Banks (RRBs)providing
11%. Nevertheless, cooperatives serve a substantial proportion of agricultural accounts, providing
smaller loans, compared to commercial banks. Cooperatives also serve a larger number of farmers;
during 2011-12, cooperatives provided agricultural credit to 3.09 crore farmers, compared to only
2.55 crore farmers served by commercial banks and 82 lakh by the RRBs45
.
44
The average agricultural loan is 28,467 for PACSs versus 1.5 lakhs for commercial banks. 45
RBI, 2013
Table 346
: Outreach and Financial Health
Source: NAFSCOB, 2013
Table 4: Government Financial Involvement
Source: NAFSCOB, 2013
46
The full table, with all the states, is in Annexure 2.
Assam
Gujarat
Karnataka
Maharashtra
Uttar Pradesh
Uttaranchal
ALL INDIA
Selected State
PACS PACS PACS PACS PACS PACS PACS PACS SCB DCCB
No. of PACS
Villages
covered as a
percentage
of total (%)
Total
membership
(000's)
Agricultural
/ Total loans
outstanding
(%)
Number of
societies in
profit
Number of
societies in
loss
Proportion
of societies
in profit
766 95% 3,034 97% 309 419 42% 13% 47%
8,810 89% 2,937 96% 5,672 1,964 74% 28% 2% 17%
4,789 98% 6,128 73% 2,860 1,689 63% 15% 2% 11%
21,394 85% 14,944 75% 9,272 11,734 44% 26% 11% 37%
8,929 100% 2,748 49% 4,536 1,968 70% 42% 5% 23%
758 100% 1,195 78% 586 167 78% 40% 3% 9%
45,446 96% 127,468 48% 42,586 37,955 53% 24.50% 5.18% 20%
Outreach Financial Health
Overdues to demand (%)
Assam
Gujarat
Karnataka
Maharashtra
Uttar Pradesh
Uttaranchal
ALL INDIA
Name of State/Union
Territory
Paid up
share capital
(lakhs)
Govt paid up
capital
(lakhs)
Proportion
of paid up
capital from
government
Paid up
share capital
(lakhs)
Govt paid up
capital
(lakhs)
Proportion
of paid up
capital from
government
Paid up
share capital
(lakhs)
Govt paid up
capital
(lakhs)
Proportion
of paid up
capital from
government
1536 996 65% 913 191 21%
63976.36 741.63 1% 41750 2617 6% 2250 0 0%
68528.62 3388.55 5% 46702 3101 7% 14652 0 0%
201519 565 0% 218774 8371 4% 44828 10000 22%
19247 4250 22% 45863 6645 14% 5811 321 6%
5785.22 642.79 11% 4093 289 7% 3391 0 0%
986830.9 76677 8% 891461 143797 16% 289424 71985 25%
Government Involvement
PACS DCCB SCB
3.4.2 Financial Health of Cooperatives
While the outreach of cooperatives is impressive, their financial health is worrisome. As shown in
Table 3, the proportion of PACSs in profit is only 53%. Some states, such as Uttaranchal and Sikkim,
have about 78% of societies in profit, while the number for Haryana and Manipur is below 15%. In
Maharashtra, which is the state with the largest number of PACSs (21,394 out of a total of 93,488 in
India), the percentage of societies in profit is 44%. This large variety in profitability illustrates the
diversity in policy and socio-economic environments.
The amount of overdues to demand is also alarming: PACSs have about 25%, DCCBs 20%, and SCBs
5%. Again, this number varies widely across states. Given particularly that the Deposit Insurance and
Credit Guarantee Corporation (DICGC) does not cover PACSs’ deposits, high overdues and low
profitability present a significant risk to depositors.
Figure 4 below presents Non-performing Assets (NPAs) as a per cent of gross advances over time47.
Trend analysis of the reported time series (Annexure 5) shows that while the NPAs in the ST CCS are
stabilizing, the amount is increasing in the LT CCS48
.
Figure 4: NPAs as a per cent of Gross Advances
47
The data used in this chart is presented in table form in Annexure 4. 48
It is worth noting that the most recent RBI/NABARD committees on rural cooperatives—the Prakash Bakshi Committees
(2013) and the Prof. A. Vaidyanathan Committee (2004)—have focused only on the short-term structure. As pointed out in
the Prof. A. Vaidyanathan Committee (2004), “the revival of the long-term cooperative credit structure is no less important
than that of its short-term counterpart” and thus requires due attention.
0
10
20
30
40
50
60
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
PACS StCBs
DCCBs SCARDBs
PCARDBs UCBs
30
3.4.3 Financial Support from the Government
The GoI and NABARD provide financial support to cooperatives through financing and paid-up
capital. In 2012, of the total resources of SCBs, borrowing constituted 25%, with almost 90% coming
from NABARD49. For DCCBs, borrowing amounted to 18% of total resources, with 78% of the
borrowing coming from NABARD (RBI, 2013). Further, the RBI has classified lending to cooperatives
as Priority Sector Lending (PSL), encouraging lending agencies to provide funds to cooperatives to
fulfil their PSL targets.
Table 4 above (expanded version in Annexure 3) shows the proportion of paid-up capital from the
government for each tier of the ST CCS. It is clear that the amount varies significantly by tier and by
state. For example, the proportion of paid-up capital from the government is 8% for PACS overall,
while it is 65% in Assam. On the other hand, the proportion of government paid-up capital is 25% for
SCBs overall but 0% in many states, such as Gujarat, Karnataka and Uttaranchal.
3.5 Current Challenges Faced by Cooperatives
The current challenges faced by Indian cooperatives today have persisted through time, often
resurfacing in studies and RBI committee reports. These include50:
1. Poor governance: This is seen particularly with regard to compliance with legal provisions,
connected lending, transparency in grant of loans, audits, internal checks and control,
recovery of dues and recruitment of qualified persons. Further, the situation is aggravated
by lax supervision and guidance by the elected Boards, delay in the conduct of elections,
frequent supersession of the Boards, and lack of participation by members in the
management and decision-making process.
2. Imprudent loan pricing: Cooperatives often offer interest rates that are too low to sustain
their operations and build an adequate capital cushion. The selection of an appropriate
interest rate is particularly difficult with borrower-dominated boards that are involved in
setting interest rates and have a preference for low-cost access to credit (Grace, 2008).
3. Lack of professionalism: Cooperative banks are typically headed by a committee of elected
members who are not professionals and do not possess sound knowledge in banking
functions. However, a minimum degree of skill and expertise is needed for the business
decisions taken by the Committee, including sanction of loans, investments, and interest
rates on deposits and loans. Further, as pointed out by the Report of the Expert Committee
to examine Three Tier ST CCS, officials from the state government deputed to these banks
may have neither the professional skills nor the requisite experience to run the banks (RBI51,
2013).
4. Poor credit discipline among borrowers: Frequent loan waiver announcements by
governments aimed to garner electoral support have vitiated the credit discipline and
affected the loan recovery atmosphere.
49
Almost the entire borrowing from NABARD was refinancing for crop loans. 50
This section is based on the issues identified by Dr. Deepali Pant Joshi, Executive Director, Reserve Bank of India, in a
speech at the National Meet of CEOs of State Cooperative Banks held at Mumbai on March 21, 2014. The issues here are
common have also been identified by the RBI over the past two decades in its committee reports.
Link to speech: http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?id=883 51
Recent initiatives to incorporate proper criteria for the CEO and the directors in the Memorandum of Understanding
(MoU) between RBI and Central and State governments is expected to alleviate this problem.
31
5. Inadequate internal control and audit: Balancing of books and reconciliation of entries are
in arrears for long periods and there are delays in the conduct of audits and the submission
of reports As a result, there are frequent incidents of fraud involving the staff, who game the
system.
6. Not keeping pace with changes: Cooperatives have lagged behind in designing new
products and services, and adopting of technology and advanced management practices. As
a result, they face difficulty in retaining their market share in rural finance.
7. Duality of control52: Under the Constitution, ‘Cooperation’ is a state subject governed by the
respective State Cooperative Societies Acts. Registration, incorporation, management,
election and audit are governed by the State Acts. Some aspects relating to banking
activities are regulated and supervised by the Reserve Bank of India/NABARD under the
Banking Regulation Act (B.R. Act), 1949. However, state laws often overlap with the
provisions of the B.R. Act.
8. Excessive government control: The government’s involvement and interference in the
cooperatives’ internal functioning has undermined their self-reliance and autonomy, and
allowed cooperatives to become a political tool, thus damaging their sustainability.
9. High dependence on external funding: Cooperatives in India rely heavily on government
funds and are thus part of an unhealthy dependency. As a result, cooperatives often cater to
their donors rather than improving operational efficiency and the quality of their services.
Instead of this, deposit mobilization should take the centre stage in raising resources.
Deposits are also an important financial service in their own right and should take a
prominent place among the products offered by financial cooperatives.53
4 Regulations in India
4.1 The Regulation of Cooperatives in India
Indian cooperatives face a complex regulatory environment, which is the result of the government’s
historical orientation of development and protection. Thus, cooperatives in India recognize the need
for control and supervision. This section first discusses the institutional structure of cooperatives,
the need and principles of regulation, the key aspects of existing cooperative regulation and
monitoring, and the challenges and recommendations made by subsequent assessments of the
cooperative sector institutions in India.
4.2 The Rationale and Principles of Cooperative Regulation
All financial systems need regulation as their clients, both borrowers and depositors, need
protection: depositors need an assurance of the safety of their deposits, and borrowers need to
have access to lending and recovery practices that are fair and non-exploitative. As finance is a
quasi-public good, it requires regulatory intervention to reach efficient outcomes. Further, market
imperfections are binding on the poor and small entrepreneurs, making the regulation of this sector
that much more important.54
The regulations of cooperatives assumes importance because:
52
The issue of duality of control is further discussed in the section on Cooperative Regulatory Environment. 53
Grace, 2008 54
Nayak, 2012
32
• The cooperative sector in India is one of the largest in the world, with a network of about six
lakh cooperative societies, a membership of about 249 million persons, and a pool of 23.86
million people whom it provides direct credit and self-employment55.
• Cooperatives take deposits from low- and middle-income people, for whom deposit safety is
a major concern.
• Cooperatives lend mostly to small and marginal farmers, and micro-entrepreneurs, whose
requirements fall into priority sector lending (PSL) and who need credit at fair prices.
• Cooperatives engage in relationship lending, with credit decisions being based on soft
information from members. This can reduce information cost and increase efficiency, but at
the same time, it can also lead to fewer professional decision-making processes and higher
credit risks.
• Cooperatives have been faced with several failures on account of mismanagement arising
from the family control of cooperatives, the use of cooperatives for political purposes, and
fraud by the leaders and staff.
Historically, cooperatives in India have had more lenient regulation compared to those in other
countries because the government has encouraged promotion and growth of the sector. More
recently, the paradigm has changed towards having a level-playing field for all types of financial
institutions, with different types of institutions having equitable representation. This will be
facilitated by promoting competition among different types of institutions, which is expected to lead
to efficient allocation of productive resources, i.e. finance. Accordingly, four principles are
prescribed for financial sector regulation: Stability, Transparency, Neutrality and Responsibility.56
4.3 The Regulations
Cooperative banks come under the purview of both the Registrar of Cooperative Societies of the
state (in which they are located) and the Reserve Bank of India. Critics of the sector believe that this
dual regulation creates inefficiencies and at the same time, prevents prompt regulatory action.
Different acts regulate the following aspects of cooperative functioning:
• Membership rules and operational procedures;
• Prudential norms relating to income recognition, asset classification, provisioning and capital
adequacy ratios. Since March 2008, cooperatives are also required to disclose the level of
CRAR in their notes to accounts in their balance annual sheets;
• Functioning of cooperatives, by mandating regular audits, board meetings and annual
general meetings for disclosure and adoption of accounts and financial decisions; and
• Government control of management in case of complaints of mismanagement and frauds by
members.
The laws which apply to financial cooperatives include:
• All State-level Cooperative Acts
Financial cooperative regulation was put in force at the Centre through the Co-operative
Societies Act, 1912. By 1919, cooperation work was transferred to the states, and each state
promulgated a cooperative law with the objective of expanding financial services systems to
remote areas and low-income populations. Although all the state laws adopt the basic
cooperative principles, differences persist based on local needs and requirements of state
governments. Most state governments contributed share capital in order to promote
55
Figures quoted by the former Minister of Cooperatives, Charan Das Mahant, in 2012 (PTI, 2012) 56
Rajan, 2009 and Mor, 2013
33
cooperatives and were therefore invested in the cooperatives. Consequently, the laws
dictated the rules for financial operations, the need for audits, and even deputed
government staff to manage the cooperatives.
The traditional cooperative acts of each state have provisions for state supervision and
control of cooperatives in case of mismanagement noticed by officials or reported by
members. With the governance and internal functioning of the cooperatives controlled by
government officials, democratic and member-managed functioning of cooperatives was
severely compromised and was the subject of many cooperative sector assessments. These
Acts resulted in cooperatives being largely state-controlled, which led to discussions and
passing of self-reliant cooperatives acts in many states.
• Self-Reliant Cooperative Society Acts/ Mutually Aided Cooperative Society Act (MACS)
Self-reliant cooperative acts have been promulgated in nine states (Andhra Pradesh,
Karnataka, Madhya Pradesh, Bihar, Jharkhand, Odisha, Chhattisgarh, Jammu and Kashmir,
and Uttarakhand). A comparison of the traditional and the SRC Acts of three states, Bhiar,
West Bengal and Andhra Pradesh, is given in Annexure 6. Two states, Odisha and Madhya
Pradesh, have repealed the self-reliant cooperative act and passed new acts aligned with the
97th
Amendment discussed below.
• The Constitution (97th Amendment) Act, 2011
In order to ensure that cooperative societies in India function in a democratic, professional,
autonomous and economically sound manner, the Centre pronounced The Constitution
(97th Amendment) Act, 2011, which aims to standardize some systems and increase the
democratic functioning of cooperatives. The Centre asked state governments to amend their
respective State Cooperative Society Actsso that it is in tune with the Constitution (97th
Amendment), 2011, before February 2013. While the announcement of the 97th
Amendment has been contested on the ground that the Centre cannot legislate on an issue
under state jurisdiction (e.g. in Gujarat), many states have amended their Cooperative Acts
subsequently, to bring them in conformity with the Amendment, and some states have
repealed the Self-Reliant Acts that were hitherto operating in their states (e.g. Madhya
Pradesh and Odisha). The implementation of the Act, however, is another matter. Under
Section 17 of the Amendment Act, a period of six months is provided within which elections
to all co-operative societies should be held from the date of commencement of the
Amendment Act. In states like Odisha, however, elections have not been held until July 2014
and this mandatory period had been exceeded by at least a year.
• The Multi-state Cooperative Societies Act, 2002 (MSCSA)
The MSCSA of 1984 was amended in 2002 to provide greater freedom from state control to
the members of the cooperatives, especially to those who have not availed of any financial
assistance from the government. The cooperatives can appoint auditors, hold elections and
hold general body meetings within six months of the closure of the financial year. However,
the 2002 Act continues to have gaps. Governance and member control provisions are still
inadequate, and in cases of reports of mismanagement, the office of the Registrar of
Cooperatives can supersede the members and take control of the cooperative, irrespective
of whether or not the cooperative has received financial assistance from the government.
Currently, most states have formed multi-state cooperative societies (MSCS), the notable
exceptions being some of the northeast states (Meghalaya, Mizoram, Sikkim and Tripura).
However, the branches of MSCS formed by other states like Assam, West Bengal and
Rajasthan are functioning in these four NE states, which do not have their own MSCSAs. The
34
MSCSA was sought to be amended in 2010, but the proposed new bill expired without being
passed.
• The Banking Regulation Act 194957
The Banking Companies Act, 1949, was amended, extended to cooperative banks from 1
March 1966, and renamed as the Banking Regulation Act, 1949 (As Applicable to
Cooperative Societies). The primary objectives of the Act are to safeguard the interest of
depositors, to develop banking institutions on sound lines, and to attune the monetary and
credit system to the larger interests and priorities of the nation. Under the provisions of the
Act, any new or existing primary cooperative banks are required to obtain a license from the
RBI. Primary (urban) cooperative banks are also required to maintain a certain amount of
cash reserves and liquid assets and can carry on banking business only if the real or
exchangeable value of their paid-up capital and reserves is more than Rs. 1 lakh. With a view
to extending institutional credit support to tiny and cottage units, the Reserve Bank of India
grants refinance facilities to urban cooperative banks (UCBs). To ensure that the UCBs
conduct their affairs in the interests of the depositors and also comply with the regulatory
framework prescribed by the RBI, the Urban Banks department undertakes on-site
inspections of these banks every one to two years depending upon the financial condition of
banks. The thrust of supervision is to ensure that banks' affairs are not conducted in a
manner detrimental to the depositors' interests and to assess the solvency of the bank with
regard to its liabilities. It is also to examine the banks' compliance with the existing
regulatory framework. After the inspections, the RBI may ask the Central Government to
issue an Order of moratorium for any UCB.
• The Deposit Insurance and Credit Guarantee Corporation Act, 1961
The deposits made in cooperative banks are protected by The Deposit Insurance and Credit
Guarantee Corporation (DICGC), an organization set up in 1961 by the RBI. All eligible
cooperative banks as defined in the DICGC Act are covered by the Deposit Insurance
Scheme. The DICGC Act covers only those states which have included in their Cooperatives
Societies Acts a provision empowering the RBI (should it find reason to do so on inspection
of the cooperative) to order the Registrar of the cooperative societies in the respective
States/Union Territories to wind up a cooperative bank or to supersede its management.
The amendment should also ensure that the Registrar is not required to take any action for
winding up, amalgamation or reconstruction of a cooperative bank without prior sanction in
writing from the RBI.
In the event of the winding up or liquidation of an insured bank, every depositor of the bank is
entitled to payment of an amount equal to deposits held by the depositor in the cooperative bank,
subject to an upper limit of 100,000 per depositor. The banks have to pay an insurance premium of
1 per cent per annum.
Since 2001, corporations have had to settle claims for large amounts due to the failure of banks,
particularly in the cooperative sector, causing a drain on the Deposit Insurance Fund (DIF).
The financial burden on account of payment of premium should be borne by the banks themselves
and should not be passed on to the depositors.58
57
A short summary of the Multi-State Cooperatives Act and the Banking Regulations Act will be provided in the next
version of the report. 58
DICGC, 2006
35
4.4 The Regulatory Gaps
A Task Force Committee on Revival of Credit Cooperative Institutions led by Prof. A. Vaidyanathan in
2004 had suggested the following measures, all of which were subsequently followed:
• A financial assistance package to revive the short-term cooperative structure.
• The enactment of a liberal law by the state government to enable the cooperatives to be
member-driven organizations.
• A legislative provision issued by the states that empowers the RBI to regulate the
cooperatives under the Banking Regulation Act and through the Registrar of Cooperative
Societies (RCS).
• The recognition of rural financial cooperatives for their unique role in serving the poor and a
separate chapter on them in the state cooperative acts.
• Access to the NABARD refinancing package for self-reliant cooperatives.
4.5 Recent Cooperative Promotion and Development Measures
In addition to regulations, the government has set up various funds for the promotion and recovery
of cooperatives. These include:
• The Financial Inclusion Fund (FIF)
The FIF was set up in 2007 on the recommendations of the Committee on Financial
Inclusion set up by the Government of India (GoI) under Dr. C. Rangarajan at NABARD
with an overall corpus of 500 crore. The objective of the FIF is to support
“developmental and promotional activities” with a view to securing greater financial
inclusion, particularly among weaker sections, low-income groups and in backward
regions/hitherto unbanked areas. The activities eligible for funding support include
capacity building inputs to Business Facilitators and Business Correspondents;
promotion, nurturing and credit linking of Self-Help Groups (SHGs); capacity building of
personnel at NABARD, banks, post offices, state government departments, MFIs, NGOs,
local-level associations, members of SHGs/joint liability groups, etc. The FIF provides
promotional support to institutions, such as resource centres, farmers’ service centres
and rural development and self-employment training institutes to enable them to
provide improved technical and financial services (including counselling) aimed at
increasing technology adoption, effective management of assets, nurturing
entrepreneurial capacity and increasing financial education and literacy. The funds may
be used for setting up of Rural Credit Bureaus and credit ratings of rural customers. The
FIF can support initiatives of local-level associations/federations and pilot projects for
the development of innovative products, processes and prototypes for financial
inclusion. It may also finance the expenses of approved institutions for undertaking
interventions for financial inclusion in Central, Eastern and North-Eastern Regions, and
Jammu &Kashmir, Himachal Pradesh and Uttarakhand.
• Financial Inclusion Technology Fund (FITF)
The Rangarajan Committee (2008) also recommended the setting up of the FITF at
NABARD with an overall corpus of 500 crore. The FITF aims to enhance investment in
Information Communication Technology (ICT) to promote financial inclusion; to
stimulate the transfer of research and technology in financial inclusion; to increase the
36
technological absorption capacity of financial service providers/users; and to encourage
an environment of innovation and cooperation among stakeholders. The activities
eligible for financing include user-friendly technology solutions, technological solutions
aimed at providing affordable financial services to the disadvantaged sections of the
society, common technology infrastructure with comprehensive credit information,
technologies facilitating the documentation of the processing of loans, and funding the
viability gap/pilot project funding for unproven but potential technological
interventions. The fund may also be used to finance studies, consultancies, research,
evaluation studies relating to technological interventions for financial inclusion;
seminars, conferences and other mechanisms for discussions; dissemination relating to
financial inclusion technological interventions; publication of financial inclusion
technology literature, publicity material, etc. The fund may be applied to capacity
building of the personnel of banks, post offices, state government departments, MFIs,
NGOs and other stakeholders.
The institutions eligible for availing the FIF and FITF include (a) Financial Institutions, viz., NABARD,
Commercial Banks, Regional Rural Banks and Cooperative Banks. (b) NGOs, MFIs, SHGs, farmers’
clubs, local-level associations, etc. (c) Service providers like insurance companies (providing micro
insurance services), post offices, railways, etc. (d) Any other organization whose objectives are in
conformity with the overall objectives of the FIF and are approved by the Advisory Board from time
to time. Training and research organizations, academic institutions, universities will also be
considered eligible for FIF.
• Rural Infrastructure Development Fund (RIDF)
The Rural Infrastructure Development Fund (RIDF) was instituted by NABARD with an
announcement in the Union Budget 1995-96, with the sole objective of giving low-cost
fund support to state governments and state-owned corporations for quick completion
of ongoing projects relating to medium and minor irrigation, soil conservation,
watershed management and other forms of rural infrastructure. Domestic commercial
banks contribute to the Fund to the extent of their shortfall in stipulated priority sector
lending to agriculture. The shortfall in disbursements of RIDF funds as compared to
sanctions is a matter of concern in the implementation of RIDF. The scope of RIDF has
been widened to include activities such as rural drinking water schemes, rural market
yards, rural health centres and primary schools, mini hydel plants, shishushikshakendras,
anganwadis59, and system improvement in the power sector. The RIDF assists the state
governments to identify and prioritize projects; appraise and sanction the projects;
provide cost-effective fund support; monitor and evaluate the projects; and associate
with the authorities for better delivery.
• Stabilization Fund
The Department of Commerce launched the Price Stabilization Fund in April 2003 as a
response to the distress caused to primary growers of tea, coffee, rubber and tobacco
due to the decline in the international and domestic prices. The main objectives of the
fund are (a) To provide financial relief to the growers when prices of these commodities
fall below a specified level. (b) To ensure sustained, long-term support to growers in
59
Aanganwadisare care centres for children in the age group of 2 to 5, andshishushikshakendrasare government primary
schools for children in the age group of 5 to 9.
37
place of ad hoc interventions during crisis. (c) To alleviate the hardship faced by the
growers due to low prices and to safeguard their interests.
The scheme works on a principle of participation, depending on the contribution of the
grower or the government and on whether it is a normal, boom or distress year. A small
grower can enroll in the scheme by depositing an entry fee of 500 and has to open a
special PSF account with a designated bank. In a Distress year, the government deposits
1000 per grower. The grower is permitted to withdraw up to 1000. In a normal year,
the government deposits 500 per grower, and each grower also deposits 500. No
withdrawal is permitted. In a boom year, the grower deposits 1000. No withdrawal is
permitted.
• ADWDRS 2008
The Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS)was launched in May
2008 to address the problems and difficulties faced by the farming community in
repayment of loans taken by them and to help them qualify for fresh loans. Under
ADWDRS, small and marginal farmers would be provided a complete waiver of an
eligible amount, and other farmers would be provided a one-time relief of 25 percent.
This one-time relief would be subject to the payment of the balance 75 percent of the
amount borrowed by the farmer. Under the scheme, direct agricultural loans disbursed
by Scheduled Commercial Banks, Local Area Banks, Cooperative Credit Institutions and
Regional Rural Banks between 1April 1997 and 31March 2007 to farmers, which were
overdue as on 31 December 2007 and remained unpaid up to 29 February 2008 were
eligible for Debt Waiver/Debt Relief.
In addition to promotional funds, there have been some regulatory changes that have provided
impetus to cooperatives. For instance, the recognition that warehouse receipts finance provides
liquidity against the harvested agricultural produce of famers and can play an important role in
smoothening their income flows, led to the promulgation of the Warehousing (Development and
Regulation) Act, 2007, whereby warehouse receipts have become negotiable instruments. The Rajan
Committee (2009) estimated that as 15-20% of the produce harvested is stored in warehouses, the
use of this provision can enable agricultural credit to extend to about 1 lakh crore.
Another key developmental measure has been the direction by the RBI to all UCBs to complete Core
Banking Solutions (CBS) implementation. To achieve this, NABARD has also initiated a project that
enables cooperatives to take financial support for establishing CBS.
4.6 Regulatory Gaps and Recommendations
The major criticism of the cooperative regulations in India has been that that they overlap, requiring
compliance from cooperative banks of both state laws and national laws. However, even with
overlapping regulation, the supervision is wanting, with both state infrastructure and RBI supervision
being weak at best. As members are currently unaware and unable to exercise control over
cooperatives, the government has been given a supervisory role. However, there is an another view
emerging, that government refinance and supervision should give way to market finance and
control.60
Several writers on the cooperative sector have made recommendations for streamlining and
strengthening existing regulations. Some of regulations are not consistent with others, and this
60
Mor, Ibid, p 169
38
report provides a compilation of the recommendations, stating the apparently contradictory ones as
well.
• Remove overlapping regulation by state and RBI, and have only RBI regulate and supervise
cooperatives.
• Strengthen the state-level supervision structure by creating state-level regulatory forums,
like the State Finance Regulatory Commission (SFRC) for instance, which supervise all the
small financial institutions at the state level. The RBI, in turn, must train, license and provide
accreditation to the SFRCs.61
• Improve transparency by providing better information on cooperatives, which is integral to
the supervision of cooperatives by members and the market.
• Create access to credit bureaus by making cooperatives’ members provide and take
information on borrowers, thereby increasing information related to creditworthiness and
reducing risks.
• Improve accountability by regulating that politicians and family members cannot be on
boards of cooperatives.
• Improve management by regulating that the management and staff of cooperatives get a
minimum required certificate, which should have prescribed standards. Currently, while the
RBI has issued directives requiring that cooperatives appoint professionals as directors on
their boards, the implementation of this directive is doubtful.
• Integrating cooperatives with markets for both equity and loans. Several commentators on
the cooperatives sector in India have recommended that cooperatives be better integrated
with markets. If cooperatives are allowed to ensure that the loans given our are secure or to
raise equity from the markets, market discipline can be enforced through more transparent
information. Rating by agencies such as CRISIL has also been suggested. Such information
and evaluation will enable depositors to respond by withdrawing and reallocating funds,
thus creating pressure on management to effectively manage resources.
• Ensure effective member control through financial literacy and member education, strong
data and information systems, and transparent and accountable processes for financial
management.
• Regulatory bodies. Several writers recommend that the regulatory supervision and
oversight of cooperatives must remain with the RBI and NABARD.
5 Financial Inclusion and the Role of Financial Cooperatives
5.1 Definitions and Dimensions of Financial Inclusion
Internationally, financial inclusion has gained currency as an important element of social and
economic inclusion, and is broadly understood as an “economic state where individuals and firms
are not denied access to basic financial services based on motivations other than efficiency
criteria”.62In India, financial inclusion has been considered a critical policy goal for state intervention,
whereby universal access to a wide range of financial services is available at a reasonable cost. These
include not only banking products but also other financial services such as insurance and equity
products.63
This refers to the broadening of financial services to those people who do not have access
to the financial services sector. Access to financial services can then be depicted as in Figure 5.
61
Mor, Ibid. 62
Amdzic et Al., 2014 63
Rajan, Ibid.
39
Figure 5: Access to Financial Services
Source: Adapted64
from: A Hundred Small Steps - Report of the Committee on Financial Sector
Reforms (Chairman: Dr. Raghuram Rajan).
Financial inclusion in India also emphasises the deepening of financial services for people who have
minimal financial services and greater financial literacy and consumer protection so that those who
are offered the products can make appropriate choices. The current Director of the Reserve bank of
India stated: “The imperative for financial inclusion is both a moral one as well as one based on
economic efficiency. Should we not give everyone that is capable the tools and resources to better
themselves, and in doing so, better the country?.”
Ultimately, the financial inclusion agenda aims to broaden the segments of the population availing
themselves of financial services; in particular, it aims to reach the poor and small entrepreneurs who
are often excluded.
The dimensions of financial inclusion are also useful, particularly in constructing measurement tools,
allowing for comparisons. According to Beck et al. (2006), the relevant dimensions are: physical
access, affordability, and eligibility. Amidzic et al. (2014) propose to use outreach, usage, and quality
of service. The World Bank’s Global Financial Development Report 2014 expresses financial inclusion
as the proportion of firms and individuals that use financial services. In India, the outreach of
financial services has traditionally been measured by the population that each bank branch serves or
the number of kilometres that it covers. More recently, financial inclusion is measured by the
number and percentage of households that have a bank account. The current state of financial
exclusion is measured in India by the following indicators:
• The percentage of population that has a deposit account (currently 50 to 55%).
• The number and percentage of villages with bank coverage. (Of the total of 600,000 villages
in India, currently only 2,11,234 are banked.)
• The number of people per branch (currently about 16,000 people per bank branch).
• The total number of rural branches (currently 39,127).
• The total number of banking correspondents (1,52,328).
• The percentage of the population with a life insurance policy (20%).
64
We have added ‘Remittances’ and removed the emphasis on ‘household’ rather than ‘individual’.
Con ngency
Planning
Access
Credit
Wealth
Crea on
Remi ances
Business Livelihood
Insurable Con ngencies
Re rement Savings
Buffer Savings
Emergency Loans
Housing Loans
Consump on Loans
Savings Services
Investment based on
level of financial literacy
and risk percep on.
40
While the concept of financial inclusion helps to focus on increasing the outreach of the formal
financial system to those who are currently denied such access, the focus on “household access”
instead of “individual access” (or just “access”) is insensitive to gender issues. The underlying
implication is that if only men have access to bank accounts (as they are currently understood as
heads of households) and thereby control the family’s resources, universal financial inclusion is not
achieved even though all households might have access. Reporting only on household statistics
would hide the gender gaps. Further, focusing on households hides the fact that many households
have multiple accounts, so do many individuals, and the simple division of accounts by the number
of households overestimates the real extent of inclusion, or underestimates exclusion. These
criticisms indicate that even as the concept of financial inclusion is useful in drawing attention to the
needs of disadvantaged groups, the indicators and measurements need to be gender disaggregated,
and better refined so as to reflect the real extent of financial inclusion or exclusion.
5.2 The History of Financial Inclusion
The belief that public policy can “alleviate financing constraints and thereby engender development
and reduce poverty” has led to the widespread implementation of credit and savings schemes in
low-income countries in the postcolonial period. These schemes continue to be implemented today,
though some evidence suggests that formal subsidized credit and political considerations in
determining credit allocation often undermine rural development and increase poverty65.
In India, the government’s promotion of financial cooperatives aimed to bring financial services to
rural areas and thereby improve development. In the words of the 1928 Royal Commission on
Agriculture in India’s report, “If cooperation fails, there will fail the best hope of Rural India.66”Other
important financial inclusion efforts include the nationalization of banks, the incorporation of
Regional Rural Banks, Service Area Approach, and the formation of Self-Help Groups.67
For example,
after 14 major banks were nationalized in 1969, banks were required to select unbanked locations
circulated by the RBI for bank expansion. To further encourage rural branch expansion, the RBI
announced a new branch licensing policy in 1977, mandating that, to obtain a license for a branch
opening in a banked location, a bank must also open branches in four eligible unbanked locations.
This policy remained in place until 1990.
More recently, there has been a global drive to consciously promote financial inclusion. Amidzic et
al. (2014) explain, “Financial inclusion has emerged as an important topic on the global agenda for
sustainable long-term economic growth. A number of central banks both in emerging and developed
countries have put in place various initiatives to promote financial inclusion in their countries. In
addition to the central banks’ initiatives, the International Monetary Fund, G20, International
Finance Corporation, the Alliance for Financial Inclusion, and the Consultative Group to Assist the
Poor are assuming an increasingly active role at the international level in collecting the data and
setting standards to improve financial inclusion.”
In India, the RBI set up the Khan Commission in 2004 to look into financial inclusion and make policy
recommendations, which it then implemented. The UNDP is also collaborating with NABARD to
increase financial inclusion of the poor by developing appropriate financial products and services,
with an emphasis on women’s financial literacy68.
65
Pande et al., 2005 66
RCA, 1979 67
Rao, 2013 68
UNDP, 2011
41
5.3 The Rationale for Financial Inclusion
According to the World Bank’s Global Financial Development Report 2014, “Research—both
theoretical and empirical—suggests that financial inclusion is important for development and
poverty reduction.”
In the worlds of Shri P. Vijaya Bhaskar, Executive Director, Reserve Bank of India:
“Financial inclusion broadens the resource base of the financial system by developing a culture of
savings among large segment of rural population and plays its own role in the process of economic
development. Further, by bringing low-income groups within the perimeter of formal banking sector;
financial inclusion protects their financial wealth and other resources in exigent circumstances.
Financial inclusion also mitigates the exploitation of vulnerable sections by the usurious
moneylenders by facilitating easy access to formal credit”.69
It is important to recall, as Amartya Sen (1985) convincingly argued, that poverty is not merely
insufficient income, but rather the absence of a wide range of capabilities, including security and the
ability to participate in economic and political systems.
5.4 The Extent of Financial Inclusion in India
There are many measures of financial inclusion. In Table 5, we draw a cross-country comparison for
selected parameters. Despite the efforts to promote financial inclusion in India, the proportion of
unbanked population is staggering. As the table below depicts, only 35% of the population above 15
years of age has an account at a formal financial institution. By contrast, in China the number is 64%
and in Germany 98%. The difference between female and overall accounts is also large in India, with
only 26% of women having an account (as compared to 35% for the overall population). This
difference is smaller for China, where 60% of women have bank accounts as compared to 63% for
the overall population. In Germany, this difference is non-existent.
It is worth noting that financial inclusion varies widely across India. In a 2011 RBI Working Paper70
,
Sadhan Kumar Chattopadhyay constructed a financial inclusion index and applied it to each state of
India. The index is based on three dimensions: penetration (number of adults having a bank
account), the availability of banking services (number of bank branches per 1000 population), and
usage (measured as outstanding credit and deposits). The results indicate that Kerala, Maharashtra
and Karnataka have achieved high financial inclusion (IFI >0.5), while Tamil Nadu, Punjab, A.P, H.P,
Sikkim, and Haryana achieved a medium level, and the rest of the states, a low level. The detailed
results are reported in Annexure 8.
69
Bhaskar, 2013 70
Chattopadhyay, 2011
42
Table 5: Financial Inclusion-A Cross-Country Comparison
Source of data: World Bank, Global Financial Inclusion Database71
According to Dr. Chakrabarty72, Deputy Governor, RBI, “Economic growth in India has not been
inclusive; unemployment and poverty remain high and a vast majority of the population remains
excluded from health and education facilities.” The RBI and the GoI are taking initiatives to address
this challenge.
5.5 Current Financial Inclusion Initiatives and Challenges in India
The RBI has under taken various policy initiatives to improve financial inclusion. These involve:
relaxed and simplified KYC norms, a simplified branch authorization policy, compulsory requirements
to open branches in un-banked villages, the opening of intermediate brick and mortar structures, a
mandated financial inclusion plan for private sector banks, and revised guidelines for financial
literacy centres (Bhaskar, 2013).73
These policies are discussed in more depth in Annexure9.
In August 2014, Prime Minister Narendra Modi announced the Pradhan Mantri Jan Dhan Yojana
scheme,74 aiming to get 7.5 crore households to open bank accounts. Under the scheme, account
holders receive accidental insurance and can avail of a 5,000 rupees overdraft (after six months)
from the bank. The program also introduced new technology to allow people to transfer funds and
check balances through a normal phone (earlier, this function was limited to smart phones).
The financial inclusion initiatives face many challenges:
• Delivery Mechanism
• Scalability: The solution to low branch penetration has been sought in the initiative of
employing Banking Correspondents (BCs). However, BCs also have low transaction volumes,
low earnings and lack of training, and some may also prove unreliable, with the risk of
misappropriation of funds.
• Products: Standardised products are unsuitable, requiring product differentiation, which
cooperatives are better able to do as compared to banks.
71
World Bank, n.d. 72
Chakrabarty, 2009 73
Bhaskar, Ibid. 74
GoI, 2014
India China Germany
Account at a formal financial institution - overall (age 15+) 35.23184 63.81731 98.13362
Female only 26.4905 60.00867 98.70454
Bottom 40% 27.11145 47.11938 97.75479
Rural only 33.14566 58.0161 NA
Debit card - overall (age 15+) 8.399502 41.02147 88.0243
Female only 4.575023 38.36354 87.24391
Bottom 40% 3.90155 22.39861 87.97781
Rural only 5.313137 35.47785 NA
Loan from a financial institution in the past year - overall (age 15+) 7.697093 7.256366 12.54911
Female only 6.742837 6.133404 10.92474
Bottom 40% 7.90341 7.680004 12.32329
Rural only 8.188866 6.92985 NA
Saved at a financial institution in the past year - overall (age 15+) 11.60398 32.08942 55.90004
Female only 7.095501 32.09019 54.84963
Bottom 40% 10.44369 18.25242 55.06023
Rural only 11.15473 27.02094 NA
Parameter
43
• Technology: Although the Indian ATM network and technology have not yet achieved the
necessary scale, the use of mobile technology is expected to contribute significantly to
financial inclusion.
• Financial Literacy: The need for financial literacy is established, as without it, the mere
opening of accounts has resulted in many accounts lying unused and others being used only
to receive Direct Benefit Transfers (DBTs), such as social protection stipends, NREGA
payments and gas subsidies. While there is recognition of the need to build the capacities of
clients and empower the demand side, there is a lack of financial literacy initiatives and the
resources needed to undertake the job at the scale needed.
• Viability: Financial inclusion involves outreach to areas which are remote and unreached,
with inadequate infrastructure for expansion of bank branches, due to which its commercial
feasibility is an issue.
Despite these challenges, the GoI and the RBI have made a strong commitment to financial inclusion,
with a plan to have at least one account per household within a defined time frame. All types of
financial institutions, i.e. commercial banks, NBFCs, Self Help Groups and cooperatives, are expected
to play a role in this ambitious initiative.
5.6 The Place of Cooperatives in the Financial Inclusion Drive
Cooperatives play a vital role in the delivery of credit to rural areas. As shown in the graph below,
cooperatives make up 16% of formal rural credit.
Although cooperatives provide only 16% of agriculture credit, they have a much higher penetration,
evidenced by the high share of cooperatives in the total number of agricultural accounts held by the
banking system. Cooperatives provided agricultural credit to 3.09 crore farmers during 2011-12, as
compared to only 2.55 crore farmers receiving from commercial banks and 82 lakhs from RRBs.
Further, the outreach of cooperatives has increased more, as they financed 67 lakh new farmers
during 2011-12, as compared to 21 lakh new farmers who were financed by commercial banks and
only 9 lakh new farmers by RRBs.75
Figure 6: Percentage of Rural Credit by Difference Agencies.
Source: Ranjan Kumar Nayak (2012)
75
RBI, 2013, pages 10-11.
16%
10%
74%
Cooperatives
Regional Rural Banks
Commercial Banks
44
Further, cooperatives have key advantages over other institutions in promoting financial inclusion.
Firstly, by being interwoven in communities, they have superior knowledge regarding borrower
quality and business opportunities. This feature is particularly useful in an environment lacking
sophisticated credit scoring models.76They also have a lower cost structure, particularly due to low
labour costs and minimal operating costs, allowing them to reach segments of the population that
are unprofitable for other banks. Cooperatives can also be more flexible to their clientele because
they are not required to hold to nationwide and global policies to alter their practices. Additionally,
since their members are both producers and beneficiaries, cooperative banks “balance the need for
profitability with the broader economic and social development needs of their members and the
larger community.”77
Therefore, cooperatives can address market imperfections (such as
informational asymmetries, transactions costs and contract enforcement costs), which are
particularly binding on poor or small entrepreneurs who lack collateral, credit histories, and
connections.
Cooperatives can play an important role in opening accounts, offering products and services that
members need, keeping costs low and sharing profits with customers, who are also members and/or
shareholders of cooperatives. Cooperatives can also work as Banking Correspondents to increase
outreach and, as evidenced in the example of the Buldana cooperative, offer directly or as agents, all
five financial services: savings, loans, insurance, pensions and remittances.
6 Going Forward and Conclusion
This report offers a summary of the literature available on cooperatives, with an emphasis on the
role of cooperatives in the current context of the official financial inclusion drive. The report shows
that cooperatives are recognised the world over as institutions that recognise the agency of people,
and being member-managed, their cost efficiency enables outreach to groups excluded due to
remote geographies and social and economic structures. These features make cooperatives an ideal
institutional form for advancing financial inclusion.
The international experience in cooperatives shows that they have a significant presence in many
countries, where cooperative principles have been valued and promoted by the state. In the
promotion of cooperatives as agencies for achieving financial inclusion, the importance of the
regulatory environment cannot be overstated. Experience shows that laws need to be clear and
subject to the same challenges as cooperatives in other countries. Indian financial cooperatives have
traditionally been controlled by politicians, other vested interests and also by government officers,
leading to poor performance. The introduction of Self Reliant Cooperatives (SRC) sought to resolve
this issue and 9 states enacted relevant laws. However, the SRC experience has also been
chequered, with these cooperatives being used to de-fraud depositors and being repealed in two
states.
In the states where both traditional and self-reliant cooperatives exist, the latter do not get
sufficient monitoring from the government. The recommendations that have been repeated in
subsequent reports of committees set up to examine the performance of cooperatives include
improved governance in terms of formation of the board and early punitive action for non-
compliance. Further, the 97th amendment to the Cooperatives Act lays down rules for auditing
improved management and official oversight, but the standardisation of state cooperative laws and
a simpler institutional structure will greatly aid the working and monitoring of the sector, giving
76
Sriram, Ibid. 77
Nayak, 2012
45
ample opportunity for cooperatives to proliferate. At the same time, the regulations need to have a
balance between promotion and safeguarding the interests of depositors by preventing
mismanagement and political control of cooperatives.
The short-term cooperative credit structure in India is elaborate, with many primary cooperatives on
the ground, centralized at the district level and federated at the state level. Long term credit
institutions have only two layers; they are primary and state level agricultural development banks.
The structure has been criticized for inefficiencies arising from competition among different layers of
institutions to reach the same clientele.
Cooperatives provide both, financial and non-financial, products and services. The financial products
include highly varied savings and loan products and insurance and remittance services, the latter
more common among UCBs. Mature UCBs and rural cooperatives have been able to start income-
generating activities which supplement the income from financial services and have also been able
to provide social support such as care for aged persons and those with other disadvantages.
Cooperatives provide 17% of the total agricultural credit in the country and have over 300 million
persons as borrowers, depositors and share holders. While the size of the sector in terms of credit is
large, the health of the cooperatives is jeopardised by the high NPAs in the system, which erode the
profitability of cooperatives. The picture varies significantly across the different states. The
government has invested in the share capital of cooperatives, and, while the average state
contribution to cooperatives shares across states is only 8% of the total share capital of the primary
cooperatives, in states like Assam, it is as high as 65%. The contribution of the state increases at the
district and state level banks, the national average being 16% and 25% respectively.
The current challenges faced by Indian cooperatives have persisted through timeand include poor
pricing of financial products and poor credit discipline amongst borrowers. The high dependence on
external funding in the initial years of cooperative development led to a dependence on government
and external agencies at the cost of members’ ownership of the cooperatives. There is inadequate
internal control and audit, a lack of professionalism in management, a slow adoption of new
technologies, and poor governance, resulting in excessive government control. At the same time, the
duality of control and supervision results in effective lack of monitoring and supervision.
An analysis of the history of cooperatives in India reveals that they are indeed in need of reform.
For over 90 of the 111 years of formal cooperative history in India, financial cooperatives have been
plagued by problems of inefficiency, high costs, and lack of viability, pointing to the need for a wide
range of cooperative reforms. While the Indian government committed to a series of cooperative
reforms, the process of change has been very slow, leaving a lot of ground to be covered before
cooperatives can become viable agents of financial inclusion.
An overview of Indian financial cooperatives exposed the lack of consistent and reliable centralized
data, which may become easily accessible after all cooperatives have adopted and operationalised
Core Banking Systems (CBS).Cooperatives can be made stronger by focussing more strongly on
savings deposits rather than just loans and by developing (even outsourcing the development of)
sophisticated products and services.
Finally, the progress of financial inclusion needs to focus on individuals rather than households and
monitor gender-disaggregated information on bank accounts. The civil society needs to take a
greater interest in cooperatives because they are an institutional form of providing agricultural and
rural finance to small holders and the landless; they can help excluded people to become financially
included.
46
As member-based institutions spread widely over rural areas and memberships among the low and
middle-income categories of people, cooperatives present themselves as ideal institutions for
widening financial inclusion, creating access to finance for a larger number of people. They are also
efficient choices for improving financial literacy and the financial capabilities of people, and offering
a wide range of financial products and services, thereby deepening financial inclusion.
47
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April-June
Sriram, M S (1999). Financial Co-operatives for the New Millenium: A Chronographic Study of the
Indian Financial Co-operatives and The Desjardins Movement, Quebec. 1999. Web link:
http://www.ruralfinance.org/fileadmin/templates/rflc/documents/1126276198203_Financial_coop
eratives_for_the_new_millenium.pdf
Sudradjat, Susanne (n.d.). The German Cooperative and Raiffeisen System – A brief overview.
Deutscher Genossenschafts- und Raiffeisenverband e.V. (DGRV). [Online] Available from:
www.dgrv.de. [Accessed: February 1, 2015]
UNDP (2012). Financial Inclusion – project update. [Online] Available from:
http://www.in.undp.org/content/india/en/home/operations/projects/poverty_reduction/financial-
inclusion/. [Accessed: March 5, 2015]
Vaidyanathan, A (2004). Task Force Committee Report on Revival of Cooperative Credit Institutions.
New Delhi: GoI and RBI
World Bank (2007). Providing Financial Services in Rural Area: A Fresh Look at Financial Cooperatives.
Washington DC: World Bank, Agriculture and Rural Development Department.
50
World Bank (n.d). Global Financial Inclusion Database. [Online] Available from:
http://datatopics.worldbank.org/financialinclusion/country/india. [Accessed: February 20, 2015]
World Council of Credit Unions (WOCCU) (2008). Technical Guide - Credit Union Regulation and
Supervision. WASHINGTON, DC: WOCCU
World Council of Credit Unions (WOCCU) (2011). United Nations Launches International Year of
Cooperatives - Credit Union, Cooperative Business Model Puts People First. News Room, October 31,
2011 [Online] Available from:
http://www.woccu.org/newsroom/releases/United_Nations_Launches_International_Year_of_Coop
eratives. [Accessed: February 25, 2015].
World Council of Credit Unions (WOCCU) (2014). 2013 Statistical Report on Credit Unions Worldwide.
Madison: WOCCU
World Council of Credit Unions (WOCCU) (n.d.). What is Credit Union – the difference between credit
union and other financial institutions. [Online] Available from:
http://www.woccu.org/about/creditunion. [Accessed: February 12, 2015]
51
Annexure 1: Organizations and Networks
I. International Organizations
International Cooperative Alliance (ICA): “The International Co-operative Alliance is a non-profit
international association established in 1895 to advance the co-operative social enterprise model.”
Website: http://ica.coop/
World Council of Credit Unions (WOCCU): “World Council of Credit Unions is the global trade
association and development agency for credit unions.”
Website: http://www.woccu.org/
II. National Organizations: Federations and Unions
National Co-operative Union of India (NCUI): “The National Cooperative Union of India is the apex
organisation representing the entire cooperative movement in the country.”
Website: http://www.ncui.coop/
National Federation of State Cooperative Banks (NAFSCOB):“The National Federation of State
Cooperative Banks Ltd. (NAFSCOB), was established on 19th May 1964 with a view to facilitate the
operations of State and Central Cooperative Banks in general and Development of Cooperative
Credit in particular.”
Website: http://nafscob.org/
National Federation of Urban Cooperative Banks & Credit Societies (NAFCUB): “The National
Federation of Urban Cooperative Banks and Credit Societies Ltd. is an Apex Level Promotional body
of Urban Cooperative Banks and Credit Societies Ltd. in the Country.”
Website: http://www.nafcub.org/
National Cooperative Agriculture & Rural Development Banks’ Federation Ltd (NCARDB): “National
Cooperative Agriculture & Rural Development Banks’ Federation Ltd is the apex level organization of
Agriculture & Rural Development Banks of the sector. The Federation was set up in 1960 & is
administered under the Multi-State Cooperative Societies Act, 2002.”
Website: http://nafcard.org/home.htm
III. State Level: Federations and Unions of Financial Cooperatives
Each state has four to five types of cooperative organizations. These typically include a union and a
federation. The higher layers of institutional arrangement discussed in chapter 4 are also federations
of the lower levels (id est, SCBs are federations of DCCBs and DCCBs are federations of PACS). For
example, Tamil Nadu has the following state level networks.
TNCUI - Tamil Nadu Cooperative Union.
TNFUCB - "Tamilnadu Federation of Cooperative Urban Banks" - This is the apex body for the 121
urban cooperative banks in the state.
TNSCB - "Tamilnadu State Apex Co-operative Bank" - This is the apex bank for all the agricultural
credit in the state; it has 23 district cooperative banks as it members. (http://www.tnscbank.com).
52
TNSCARD Bank - "Tamilnadu State Cooperative state Agriculture and Rural Development Bank
(TNSCARDB)."
TAICO Bank - "Tamilnadu Industrial Cooperative Bank Limited."
IV. Training and Educational Institutes: National
Vaikunth Mehta National Institute of Cooperative Management (VAMNICOM): “The Vaikunth
Mehta National Institute of Cooperative Management has been contributing over the years to the
Cooperative Movement through its activities viz. Management Training, Management Education,
Research & Publication, Consultancy, and other related activities.”
Website:http://vamnicom.gov.in/en/
Indian Society for Studies in Cooperation (ISSC): “The objective of ISSC is to study, research, and
teach: Cooperative Principles and Philosophy, Cooperative Policy development in India and Abroad,
Economic, Social, Political and Administrative aspects of Cooperation, Management of Cooperative
enterprises.”
Website: http://isscpune.org/
College of Agricultural Banking (CAB): Training institute established by the RBI in 1969 “to meet the
exclusive training requirements of co-operative banks.” “Over the years, the emphasis shifted from
co-operative banks to the broader sphere of agricultural development banking and finance.”
Website: http://cab.org.in/
Banker Institute of Rural Development (BIRD): “Bankers Institute of Rural Development (BIRD),
Lucknow is a premier institute for providing training, research and consultancy services in the field of
agriculture and rural development banking in India. The Institute was established in 1983 by
National Bank for Agriculture and Rural Development (NABARD), the apex development bank
supporting agriculture and rural development in India.” In 2009, BIRD established the Centre for
Professional Excellence in Cooperatives (C-PEC).
Website: http://birdlucknow.in/
IV. Training and Educational Institutes: State Level
In many states, there are cooperative training institutes of two types: Regional Institutes of
Cooperative Management (RICMs) and Institutes of Cooperative Management (ICMs).
The RICMs include: RICM Bangalore (Karnataka), RICM Chandigarh, Netaji Subhash RICM (West
Bengal), D.N.S. RICM (Bihar), UdaybhanSinghji RICM (Gujarat).
The ICMs include: ICM Hyderabad (Andhra Pradesh), ICM Imphal (Manipur), ICM Kannur (Kerala),
Indira Gandhi ICM Lucknow (Uttar Pradesh), ICM Madurai (Tamil Nadu), Dhananajay Rao Gadgil ICM
(Maharashtra), Dr. V.V. PatilICM (Maharashtra), ICM Thiruvananthapuram (Kerala), Madhusudan
ICM (Orissa), ICM Bhopal (Madhya Pradesh), Natesan ICM (Tamil Nadu), ICM Dehradun
(Uttarakhand), ICM Guwahati (Assam), ICM Jaipur (Rajasthan).
53
Annexure 2: Outreach and Financial Health of Financial
Cooperatives
Table 6: Outreach and Financial Health
Source: NAFSCOB, 2013
Andaman and Nicobar
Andhra Pradesh
Arunachal Pradesh
Assam
Bihar
Jharkhand
Chandigarh
Chhattisgarh
Delhi
Goa
Gujarat
Haryana
Himachal Pradesh
Jammu and Kashmir
Karnataka
Kerala
Madhya Pradesh
Maharashtra
Manipur
Meghalaya
Mizoram
Nagaland
Orissa
Puducherry
Punjab
Rajasthan
Sikkim
Tamil Nadu
Tripura
Uttar Pradesh
Uttaranchal
West Bengal
ALLINDIA
Name of State/Union
Territory
PACS PACS PACS PACS PACS PACS PACS PACS SCB DCCB
No. of PACS
Villages
covered as a
percentage
of total (%)
Total
membership
(000's)
Agricultural
/ Total loans
outstanding
(%)
Number of
societies in
profit
Number of
societies in
loss
Proportion
of societies
in profit
46 23.0 10.4 100% - - - 35% 25%
2807 91.4 12056.4 82% 1222 1585 44% 27% 1% 24.4
34 12.9 21.0 0% 13 19 41% - 89%
766 95.3 3034.4 97% 309 419 42% 13% 47%
8463 100.0 9765.0 0% 1180 3962 23% 47% 43% 54.29
68.03
17 66.7 3752.0 100% 10 2 83% 47% 30%
1213 100.0 1780.4 88% 834 379 69% 25% 6% 30.45
7%
100 89.6 79.0 10% 54 25 68% 43% 21%
8810 88.7 2936.5 96% 5672 1964 74% 28% 2% 16.67
656 100.0 3612.0 94% 95 561 14% 30% 0% 25.51
2135 100.0 1447.0 98% 1718 343 83% 23% 24% 25.44
765 98.1 144.2 60% 275 356 44% 78% 49% 39.81
4789 97.7 6128.4 73% 2860 1689 63% 15% 2% 10.75
2915 100.0 24144.1 13% 1163 857 58% 21% 16% 12.12
4457 96.1 5249.5 88% 2153 2129 50% 29% 2% 33.27
21394 84.8 14944.0 75% 9272 11734 44% 26% 11% 37.09
223 100.0 127.9 0% 24 194 11% 7% 90%
179 51.9 88.9 96% 86 93 48% 87% 75%
133 100.0 0 100% - - - - 27%
1719 100.0 13.7 21% - - - 91% 38%
2701 96.0 5281.7 91% 645 2028 24% 42% 3% 22.05
53 100.0 162.0 27% 24 29 45% 30% 10% 7.86
1609 88.2 719.5 95% 925 472 66% 18% 1% 12.61
5671 95.7 4742.7 61% 4049 1113 78% 30% 2%
169 100.0 298.9 100% 58 15 79% - 36%
4307 94.4 10420.1 29% 2377 1650 59% 7% 1% 5.17
268 97.5 372.2 80% 102 166 38% 96% 12%
8929 100.0 2748.0 49% 4536 1968 70% 42% 5% 22.91
758 100.0 1195.0 78% 586 167 78% 40% 3% 8.87
7402 97.4 12193.2 72% 2344 4036 37% 36% 7% 19.09
93488 95.5 127467.8 48% 42586 37955 53% 24.5 5.18 20.37
Outreach Financial Health
Overdues to demand (%)
54
Annexure 3: Government Involvement in Finances of Cooperatives
Table 7: Government Involvement
Source: NAFSCOB, 2013
Andaman and Nicobar
Andhra Pradesh
Arunachal Pradesh
Assam
Bihar
Jharkhand
Chandigarh
Chhattisgarh
Delhi
Goa
Gujarat
Haryana
Himachal Pradesh
Jammu and Kashmir
Karnataka
Kerala
Madhya Pradesh
Maharashtra
Manipur
Meghalaya
Mizoram
Nagaland
Orissa
Puducherry
Punjab
Rajasthan
Sikkim
Tamil Nadu
Tripura
Uttar Pradesh
Uttaranchal
West Bengal
ALL INDIA
Name of State/Union
Territory
Paid up
share capital
(lakhs)
Govt paid up
capital
(lakhs)
Proportion
of paid up
capital from
government
Paid up
share capital
(lakhs)
Govt paid up
capital
(lakhs)
Proportion
of paid up
capital from
government
Paid up
share capital
(lakhs)
Govt paid up
capital
(lakhs)
Proportion
of paid up
capital from
government
98.28 26.73 27% 349 0 0%
60516 1463 2% 105279 26059 25% 27435 184 1%
334.73 122.96 37% 19239 19194 100%
1536 996 65% 913 191 21%
9542.72 3183 33% 15874 8503 54% 2083 478 23%
3324 2222 67%
86 64 74%
9827 1391 14% 20601 1959 10% 9061 1972 22%
730 0 0%
245.03 28.78 12% 2062 125 6%
63976.36 741.63 1% 41750 2617 6% 2250 0 0%
53303.89 2449.62 5% 37235 3769 10% 11431 663 6%
10964.79 1645.17 15% 501 195 39% 848 241 28%
641 329 51% 827 220 27% 164 68 41%
68528.62 3388.55 5% 46702 3101 7% 14652 0 0%
218230.32 14454.25 7% 26020 4663 18% 39169 29420 75%
64236 5479 9% 70441 2787 4% 30749 0 0%
201519 565 0% 218774 8371 4% 44828 10000 22%
434.11 0 0% 1521 1027 68%
762.63 583.96 77% 600 204 34%
607 469 77%
255.08 100.74 39% 3819 2754 72%
40280.05 6614.27 16% 59464 6795 11% 20676 1698 8%
1772.08 1102.45 62% 16574 221 1% 1552 188 12%
4078.61 2775.42 68% 38477 5993 16% 8339 20 0%
46170.48 7847.98 17% 11156 164 1%
171.15 60.35 35% 1167 926 79%
75455.6 9481.39 13% 126099 57943 46% 19191 26 0%
1139.86 487.74 43% 1956 792 40%
19247 4250 22% 45863 6645 14% 5811 321 6%
5785.22 642.79 11% 4093 289 7% 3391 0 0%
27779.29 6466.22 23% 13563 1445 11% 3589 796 22%
986830.9 76677 8% 891461 143797 16% 289424 71985 25%
Government Involvement
PACS DCCB SCB
55
Annexure 4: Gross Non-performing Assets of Financial Cooperatives
Table 8: Gross Non-performing Assets of Cooperative Banks
Source: RBI, 2014
56
Annexure 5: Trend Analysis of NPAs of Financial Cooperatives
Figure 7: Trend Analysis of PACSs’ NPAs as a Fraction of Gross Advances
Source: Author’s own calculations
Figure 8: Trend Analysis of DCCBs’ NPAs as a Fraction of Gross Advances
Source: Author’s own calculations
Figure 9: Trend Analysis of SCBs’ NPAs as a Fraction of Gross Advances
Source: Author’s own calculations
15
20
25
30
35
40
45
50
1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
PACS
PACS 5-year Moving Average
PACS Moving Average
PACs NPA
0
5
10
15
20
25
30
1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
DCCBs
DCCB 5-year Moving Average
DCCB Moving Average
DCCBs NPA
4
6
8
10
12
14
16
18
20
1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
SCBs
SCBs 5-year Moving Average
SCBs Moving Average
StCBs NPA
57
Figure 10: Trend Analysis of PCARDBs’ NPAs as a Fraction of Gross Advances
Source: Author’s own calculations
Figure 11: Trend Analysis of SCARDBs’ NPAs as a Fraction of Gross Advances
Source: Author’s own calculations
Figure 12: Trend Analysis of UCBs’ NPAs as a Fraction of Gross Advances
Source: Author’s own calculations
0
5
10
15
20
25
30
35
40
45
50
1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
SCARDBs
SCARDBs 5-year Moving Average
SCARDBs Moving Average
SCARDBs NPA
0
10
20
30
40
50
60
1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
PCARDBs
PCARDBs 5-year Moving Average
PCARDBs Moving Average
0
5
10
15
20
25
1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
UCBs
UCBs 5-year Moving Average
UCBs Moving Average
UCBs NPA
58
Annexure 6: Comparison of the Old State Cooperative Act and Sle
Reliant State Cooperative Acts of Three states
1. The Bihar Co-operative Societies Act, 1935 and The Bihar Self-Supporting Cooperative
Societies Act, 1996
The Bihar Co-operative Societies
Act, 1935
The Bihar Self-Supporting
Cooperative Societies Act, 1996
Year of Enactment 1935 Enacted by the Legislature of the State
of Bihar in the Forty-seventh year of
the Republic of India.
Preamble
To consolidate and amend the law
relating to cooperative Societies in
the States of Bihar; whereas it is
expedient to facilitate the
formation, working and
consolidation of Cooperative
Societies for the promotion of
thrift, self help and mutual aid
among agriculturists and other
persons with common needs and
for that purpose to consolidate
and amend the law relating to
Cooperative Societies in the States
of Bihar.
To provide for the voluntary formation
of Cooperative Societies as
accountable, competitive, self-reliant
business enterprises, based on thrift,
self-help and mutual aid and owned,
managed and controlled by members
for their economic and social
betterment and for the matters
connected therewith or incidental
thereto.
Cooperative Principles and Identity
Cooperative principles mentioned
but not defined.
Cooperative Principles incorporated in
the main body of the Act along with
definition of Cooperative Identity.
Rules
The State Government can make
rules to carry out all or any of the
purpose of this Act (Forms,
conditions and extent of the
members, acceptance and
withdrawal/expulsion of
members).
The State Government through
notification may make rules, to carry
out all or any of the provisions of this
Act.
Byelaws
Can be amended by registrar if the
amendment is necessary or
desirable in the interest of the
society and sufficient time has
been given to amend the byelaws
Except on such specific matters, which
the Act has provided, the functioning
of every Cooperative Society shall be
regulated by its byelaws subject to the
provisions of this Act.
59
but the managing committee has
failed to make such amendments.
A Cooperative Society may amend any
of the provisions of its byelaws by a
resolution of its general body, or by
the representative of general body,
where this exists of a majority of two-
third members having voting right.
No power to supersede the managing
committee vests either with the Govt.
or the Registrar of Cooperative
Society.
Appointment of
Registrar
The Govt. may appoint a person to
be the Registrar of Cooperative
Societies for the whole state for all
types of Cooperative Societies and
may appoint a person or persons
to assist him.
The State Government may appoint a
person to be Registrar of Self-
Supporting Cooperative Societies for
the State or any portion of it, and may
appoint other officers to assist such
Registrar.
The Registrar The State Government may
appoint a person to be Registrar of
Cooperative Societies for the State
of any portion of it, and may
appoint persons to assist such
Registrar.
The State Government may appoint a
person to be Registrar of Self-
Supporting Cooperative Societies for
the State or any portion of it, and may
appoint other officers to assist such
Registrar.
Registration. An application for the registration
of a society shall be made to the
Registrar, and shall be
accompanied by a copy of the
proposed bye-laws of the society;
and the persons by whom or on
whose behalf such application is
made shall furnish such
information in regard to the
society as the Registrar may
require.
Where not less than ten individuals
each being a member of a different
family intend to form a Cooperative
Society, they, after framing bye-laws
for this purpose on the basis of section
3 and in accordance with section 9,
may apply for registration under this
Act.
A cooperative registered under section
11 of the Bihar Cooperative
Societies Act, 1935 can convert itself
into a Cooperative Society under this
Act, after framing byelaws.
Power of Registrar to
decide certain
questions
When any questions arises
whether a person is an
agriculturist or any person is
resident in a particular town or
village, or whether to or more
villages shall be considered to
form a group or whether any
person belongs to any particular
tribe, class or occupation, the
question shall be decided by the
Registrar, whose decision shall be
final.
Act is silent on powers of registrar on
such matters. Cooperative tribunal can
take note of the dispute and the
representative general body can take
issues of eligibility.
60
Registrar has power to sanction
compromise between a registered
society and its creditors.
Management The management of registered
society shall be vested in a
managing committee constituted
in accordance with the provisions
of this Act and rules/ byelaws of
the society made under this Act.
The general body of a Cooperative
Society shall constitute a board in
accordance with the byelaws.
The size of the board shall be in
accordance with the byelaws.
Membership
In matters of admission and
expulsion of members, the
Registrar has final authority to
determine.
Admission of members and removal
from membership shall be made in
accordance with the procedure
specified in the byelaws only by an
elected board or by the general body.
Share Capital The Act envisages for Govt.
participation in the Share Capital
of Cooperative Societies to aid the
growth of a registered society and
assist indirectly besides providing
of Govt. guarantee on loans raised
by the Cooperative Societies.
A Cooperative Society may accept
funds/guarantees from the
Government or other financing
institution for the fulfillment of its
objectives on such terms and
conditions as are mutually contracted
upon.
Audit
The Registrar shall audit or cause
to be audited by some person
authorised by him by general or
special order in writing in this
behalf the accounts of every
registered society once at least in
very year.
Audit of accounts required to be
conducted by an auditor selected from
the panel Prepared by federation.
Auditor shall either be a Chartered
Accountant within the meaning of the
Chartered Accountants Act, 1949 or
from the office of the Registrar.
Inspection by Registrar
The Registrar may from time to
time inspect a registered society
himself or cause it to be inspected
by some person authorised by him
in this behalf by general or special
order.
If the Cooperative Union/Federation is
unable to get the audit of the
Cooperative Society conducted for any
reason, the Registrar shall get the
accounts of the Cooperative Society
audited.
Govt. Nominees
Govt. may nominate its members
on the management of
cooperative societies where it has
subscribed to the share Capital or
has granted the repayment of
loans or interest thereto.
No such provision is mentioned in the
Act.
Supersession
Govt./Registrar of Cooperative
Societies vested with the powers
to supersede the management of
Cooperative institutions
persistently found negligent in the
No power to supersede the managing
committee vests either with the Govt.
or the Registrar.
61
discharge of its legitimate
functions.
Disposal of disputes
Registrar can dispose the cases
under his jurisdiction and as per
byelaws. Cases beyond jurisdiction
may be transferred to Civil court
whose decision shall be final.
Cooperative Tribunals, to be
constituted by state governments.
Disputes may be referred to the
Cooperative Tribunal for decision:
If the disputing parties have exhausted
all available in the byelaws for the
settlement of disputes.
Elections
Procedure for conducting
elections prescribed under Rules
and the tenure of Management
three years.
Elections shall be conducted in the
manner specified in the byelaws
before the term of office of the
outgoing directors comes to an end.
The term of office of the director of
the board, or where the byelaws
provide for retirement of directors by
rotation, the term of office of the
individual director, shall be for such
period as specified in the bye-laws but
shall not exceed three years from the
date of assumptions of office.
Separate chapters
Land Development Banks No separate chapters.
Nomination
Transfer of interest on death of
member to the nominated person.
Transfer of interest on death of
member to the nominated person.
Votes of members
Each member of a registered
society shall have one vote only as
a member in the affairs of the
society, provided that in the case
of an equality of votes, the
Chairman shall have a casting
vote.
A person admitted as a member may
exercise the rights of membership,
including the right to vote, only on
fulfillment of such conditions as may
be laid down from time to time in the
bye-laws.
2. The West Bengal WB State coop. Act 2006 and WB State Coop Act, 2013
WB State coop. Act 2006 WB State Coop Act, 2013
Year of Enactment
The Act was enacted during the year 2006 by the
State Legislature and received the assent of the
President of India on 25th May 2010.
The Act enacted by the State legislature in the
year 2013 and has received the assent of the
Governor on 26th April 2013.
Date of Enforcement
62
The Act has come into 18th January 2011 vide
Notification No. 177 –Coop/H/2R – 1/2006.The
Act has replaced the West Bengal Co-operative
Societies Act, 1983.
Came in to effect from 19th Feb 2013
Preamble
To facilitate the voluntary formation and
democratic functioning of the Co-operative
societies in the state to act as instruments in
providing social justice, equity and economic
development. This is in alignment with the
Directive principles of the state policy.
No change
Cooperative Principles and Identity
It is a recognised as a democratic organisation
based on voluntary membership. It owned and
controlled by members. The co-operative
becomes a body corporate post registration.
No change
3. Jammu and Kashmir State coop. Act and JK Self Reliant Act
J&K Cooperative Societies Act of 1989 Jammu and Kashmir Self Reliant Cooperative
Act of 1999
Year of Enactment
The Act was enacted during the year 1989 by the
State Legislature and received the assent of the
Governor on 8th July 1989.
The Act enacted by the State legislature in the
year 1999 and has received the assent of the
Governor on 11th of May 1999.
Date of Enforcement
The Act has come into force w.e.f. 05.12.1989
and is concurrently in force with the J&K Self -
Reliant Cooperatives Act of 1999.The Act has
repealed the Cooperative societies Act of 1960.
Enforced vide SRO 497 with effect from
15.11.1999.
Preamble
Law Relating to Cooperative Societies in the
State with a view to providing for orderly
development of Cooperative movement in the
state in accordance with the directive Principles
of State Policy enunciated in the constitution of
Jammu and Kashmir.
An Act to provide for the formation and
transformation of Cooperatives as Self Reliant,
self help, Mutual aid, autonomous, voluntary
democratic, business enterprises,
owned managed and controlled by members for
their economic and social betterment through
the financially gainful provisions of core services.
Cooperative Principles and Identity
Not defined under the Act. Cooperative Principles incorporated in the main
body of the Act along with definition of
Cooperative Identity.
63
4. Andhra Pradesh Cooperative Society Act, 1964 and Andhra Pradesh Mutually Aided
Cooperative Societies Act, 1995
Old Act New Act
1. Principles of Cooperation
Not stated in the Act. Principles of cooperation as inter-nationally
accepted at the time of enactment are
incorporated in the Act.
2. Role of Government
Section 4
Appoints Registrar; can direct Registrar; can
postpone elections; can exempt cooperatives from
legal provisions; can nominate directors to board;
can appoint persons-in-charge for state level
federations; frames rules; can handle appeals,
revisions, reviews; can give directions to
cooperatives regarding reservations on staff; can
hold equity in cooperatives; sets up Special Courts
and Tribunals.
Appoints Registrar; can not provide share
capital, but may provide other funds and
guarantee to cooperatives based on
memorandum of understanding that it may
enter into with cooperative; sets up Special
Courts and Tribunals.
3. Role of Registrar
Registers cooperative at his discretion; registers
byelaws; must approve of transfer of assets &
liabilities, of division, of amalgamation; can
compulsorily amalgamate, divide, etc.; can classify
cooperatives; can amend bylaws compulsorily;
must approve of all byelaw amendments; can
admit members; must approve of expulsion of
members; can disqualify committee members; can
call for special general meetings and for meetings
of no-confidence; conducts elections; can
supersede committees; appoints persons in-
charge; can give directions for cooperatives; fixes
honorarium to president; approves of bank in
which deposits can be kept; must approve of
investments in own business; audits; inspects;
inquires; can summon documents, etc.; can
surcharge; can suspend officers; settles disputes;
winds up cooperative appoints liquidators; can
cancel registration; can recover dues; serves on
cooperative tribunal; sanctions institution of
prosecution; handles appeals, revisions, reviews;
can appoint supervisory staff in cooperatives;
constitutes common cadres; approves of staffing
pattern; must approve of appointment/removal of
chief executive where cooperative is in receipt of
government aid.
Has to register cooperative and its byelawsif
they are in consonance with the
Act;registers amendments to certain
byelawprovisions; takes on record
amendments tomost byelaw provisions;
convenes generalbody meeting where a
board fails to do soin stipulated time;
receives annual reports and audited
financial statements; inquires; can conduct
special audit where nonmember funds are
involved; can recommend dissolution to the
tribunal if a
cooperative works in contravention of the
Act and principles of cooperation, etc.
4. Rules
The government is empowered to make rules on
every subject covered by the Act.
There is no rule-making power. All affairs of
a cooperative are to be regulated by the
provisions of the Act and the byelaws of the
64
cooperative.
5. Multiplicity of cooperatives
Registration can be refused because of non-
viability, conflict of area of jurisdiction, for same
class of cooperative.
Registration cannot be refused except if
byelaws are not in accordance with Act,
therefore, multiplicity of organizations
possible Registrar does not have the right to
classify cooperatives.
6. Membership
In matters of admission, disqualification and
expulsion of members, the Registrar has final say.
Admission disqualification and expulsion of
members are the exclusive prerogative of
the cooperative.
7. Management
Size of board fixed; term of board fixed;
composition of board fixed; elections by Registrar;
reservations on board.
Size, term, composition of board left to
byelaws; staggered terms; elections by
incumbent board failing which by ad-hoc
committee; disqualification of all directors
for not conducting elections in time, for not
conducting general body meetings in time,
for not placing audited accounts before the
annual general meeting.
8. Staff
Common cadre possible; too little authority with
board; Registrar must approve staffing pattern,
service conditions, salaries, etc.; an improve
deputations from government.
All staff fully accountable to cooperative;
deputations from government and other
organizations are possible if a cooperative
so deserves.
9. Share capital
Government and other non-members .may
contribute share capital.
Members alone can contribute share capital
and non-member share capital is forbidden.
10. Mobilisation of funds
Cooperatives may mobilise funds within the limits
fixed by Registrar.
Cooperatives may mobilise funds within the
limits fixed by byelaws.
11. Investment of funds
Investment of funds even in own business
restricted, lending limits are fixed by Registrar.
No restriction in investment in own
business, but other investments to be in any
non-speculative manner specified by
byelaws.
12. Deficit
The issue of deficit not addressed; accumulated
deficits are dealt with at the time of liquidation.
Deficit is required to be analyzed and dealt
with on an annual basis; members have to
meet the deficit in proportion to their
actual use or commitment to the use of the
services of the cooperative during the year,
if the deficit cannot be set off against
reasons.
13. Audit
Audit is the responsibility of audit wing of the
department; choice of auditors not available to
cooperatives; no penalty for non-conduct of audit.
Audit is the responsibility of the board;
auditor to be chartered accountant or from
Registrar's office at cooperative's discretion;
non presentation of audit report to general
body in stipulated time results in
disqualification of all directors.
65
14. Subsidiaries
No subsidiary organisation can be set up by a
cooperative.
A Cooperative may set up subsidiary
organisations.
15. Rights and privileges
Exemptions from payments of contains stamps,
duties, etc.
Same as available in 1964 Act.
16. Disputes
Registrar or his appointee is the sole arbitrator. Byelaws must contain manner of settlement
of disputes, only after which Tribunal has
been given role; Registrar has no role.
17. Offences
Offences to be tried by Special Courts;several
offences mentioned in detail andtheir penalties,
too; prior permission ofRegistrar necessary for
prosecution.
Special Courts to look at offences;directors
and officers to prove that they tried to
prevent offence, otherwise held responsible
for the offence; any affected party can
move Special Court; any persons entrusted
with responsibility by the Act willbe
deemed to have committed offences if the
responsibility is neglected.
18. Dissolution
Only by Registrar, only in the event of poor
functioning; voluntary dissolution by members is
not possible; no time limit on liquidation
proceedings.
By members and by Tribunal; not
justbecause of non-viability, but also
because of lack of interest in continuing
cooperative; for not functioning in
accordance with the
Act and Principles of Cooperation;
liquidators proceedings to be completed in
2 years.
19. Final disposal of assets
After dissolution, surplus assets of a cooperative
will vest in Registrar.
After dissolution, surplus assets of a
cooperative will be disposed of
inaccordance with the byelaws of that
cooperative.
20. Cooperative
Projected as an instrument for public good, as
channel for distribution of government resources.
Defined as instrument of its members for
their economic social betterment, based on
mutual aid.
66
Annexure7: Cooperative Acts Enacted across States
Table 9: Different Cooperative Acts across States
SL Region States
Old State
Cooperative
Society Act
Self Reliant
Cooperative
Act
Modified or
re-
engineered
State
Cooperative
Society
Act78
Multi-State
Cooperative
Society Act
South
1
Pondicheri �
�
2
Karnataka � � � �
3
Tamil nada �
� �
4
Kerala �
�
5
Telangana � � � �
6
Andhra Pradesh � � � �
7
Goa �
�
North
8
Delhi �
�
9
Uttar Pradesh �
� �
10
Uttarakhand � �
�
11
Jammu &Kashmira � � � �
12
Himachal Pradesh �
�
13
Haryana �
� �
14
Punjab �
�
15
Chandigarh �
�
West
16
Rajasthan �
� �
17
Gujarat �
� �
18
Maharashtra �
� �
19
Dadra and Nagar
Haveli �
20
Dman and Diu �
21
Madhyapradesh �
�
East
22
Bihar � � � �
23
Oridissa �
� �
78
Modified based on the revival package after the Vaidyanathan Committee and after the 97th
Amendment Act, 2011.
67
24
Jharkhand � � � �
25
Chhattisgarh � �
�
26
West Bengal �
� �
North- East
27
Assam �
�
28
Arunachal Pradesh �
� �
29
Meghalaya �
�
30
Nagaland �
� �
31
Manipur �
� �
32
Mizoram �
�
33
Sikkim �
�
34
Tripura �
�
Islands
35
Andaman and
Nicobar Island �
36
Lakshadweep �
Total
36 8 22 31
68
Annexure8: State wise Financial Inclusion
Table 10: State-wise Index of Financial Inclusion
State D1 (Penetration) D2 (Availability) D3 (Usage) IFI IFI Rank
High Financial Inclusion (0.5 - 1)
Kerala 0.7 0.81 0.28 0.54 1
Maharashtra 0.62 0.29 1 0.53 2
Karnataka 0.72 0.47 0.46 0.53 3
Medium Financial Inclusion (0.3 - 0.5)
Tamil Nadu 0.7 0.43 0.38 0.48 4
Punjab 0.45 0.69 0.29 0.45 5
Andhra Pradesh 0.56 0.3 0.41 0.41 6
All-India 0.27 0.22 0.55 0.33 7
Himachal Pradesh 0.42 0.4 0.18 0.33 8
Sikkim 0.28 0.33 0.34 0.32 9
Haryana 0.39 0.5 0.12 0.32 10
Low Financial Inclusion (<0.3)
West Bengal 0.24 0.38 0.23 0.28 11
Gujarat 0.32 0.3 0.16 0.26 12
Uttar Pradesh 0.28 0.31 0.15 0.24 13
Meghalaya 0.21 0.28 0.14 0.21 14
Tripura 0.31 0.22 0.08 0.2 15
Orissa 0.26 0.23 0.11 0.2 16
Rajasthan 0.25 0.22 0.12 0.19 17
Arunachal Pradesh 0.2 0.16 0.14 0.17 18
Mizoram 0.13 0.26 0.09 0.16 19
Madhya Pradesh 0.18 0.21 0.08 0.16 20
Bihar 0.15 0.24 0.08 0.15 21
Assam 0.17 0.17 0.07 0.13 22
Nagaland 0.03 0.01 0.07 0.05 23
Manipur 0 0.01 0.01 0.01 24 Source: Chatopadhyay, 2011
69
Annexure9: Financial Inclusion Initiatives
Figure 13: Financial Inclusion Initiatives
RBI, 2013
