Bring in two-tier cooperative sector

Cutting out DCCBs from three-tier rural cooperative credit structure will reduce intermediation costs and plug fund leakages

By Author B Yerram Raju   |   Published: 6th Jan 2018   12:03 am Updated: 5th Jan 2018   10:31 pm

Telangana is a trendsetting State that has proved its maturity in thinking, policy, performance and reforms. Its unparalleled digital journey led to TS-iPASS, T-Hub, T-Wallet, Ma Bhoomi and many startups securing the first rank in EoDB. Its growth rates in agriculture and services have put the State atop in the country.

It has set a new standard in getting governance closer to people by decentralising administration by carving out 31 districts from the initial 10 at the time of its formation. The State has also become a favoured investment destination. Global Entrepreneurship Summit and World Telugu Conference have firmly placed it on the global radar.

Yet, it is aware that the journey is unfinished and there are many miles to go. The visionary Chief Minister has now seen good potential in the cooperative sector if reformed through appropriate legislative interventions. Here are a few thoughts on this reforms:

Ill-gotten Legacy

All the Primary Agricultural Cooperative Societies (PACS) except 14 that do not have either proper records or are stuck in frauds have been computerised. This assumes importance against the backdrop of the failure of both the previous State government and Nabard to computerise the short-term cooperative credit structure. Funds released for them through the Vaidyanathan package 2006 were grossly misspent.

Amendments to the AP State Cooperative Act 1965 and 1994 suffered due to vested interests. The 97th Constitution Amendment Act 2011 suggested by the government for State adoption by January 2013 was not taken forward as it would have made cooperatives instruments of economic development with proper governance and apolitical agenda.

The State has an ill-gotten legacy of three-tier Rural Cooperative Credit Structure: Telangana State Cooperative Bank (TSCAB-Scheduled) at the State level; District Cooperative Central Banks (DCCBs-10) and the PACS. Several States in the country have only two-tier structure — Apex Bank, its branches and PACS. Such two-tier structure has led to a reduction in intermediation costs and leakages in the funds reaching the poor.

At the insistence of the Reserve Bank of India, the DCCBs have embraced core banking solutions and Basel II norms of capital regulation. But they still are neither secure for depositors nor responsible credit outfits for borrowers. The question before the Telangana government should, therefore, be: why carry this ill-gotten legacy?

Where to Start

There are arguments and counter-arguments on which tier should be given up for structural reforms in the cooperative sector: DCCBs are expensive outfits, save exception like Karimnagar.

Though the DCCB Boards are packed with PACS, they did not add value either to the PACS or farmers, artisans and rural retailers. The repeated frauds and misappropriations like in Warangal DCCBs should ring warning bells. Existing DCCBs, after the merger with the Apex Bank, can be converted into branches of TSCAB. The latter can open new branches where necessary and operate through PACS as business correspondents on a non-competing basis of TSCAB in remote rural areas where no branch of any bank operates.

PACS, on the other hand, carry the unique advantage of extending services to farmers in addition to extending credit. In the earlier dispensation, these PACS –- member-driven and member-controlled and member-serviced organisations -– were the first step for political careers of many a politician today. Manually-driven Systems were all manoeuvred by vested interests.

Computerisation of PACS

Audits lacked necessary rigour as its auditors lacked knowledge of double entry bookkeeping introduced by Nabard post the Vaidyanathan Committee. Accounting books were kept open beyond March 31 to accommodate recoveries even up to June 30 and they lacked integrity. All these have now been rectified with computerisation of PACS providing access even to Ma Bhoomi rendering better due diligence for effective online lending. Mirror accounts can be seen online by the Apex Bank or DCCB that finances the PACS.

In addition, PACS can extend services like selling all inputs virtually at the doorsteps of farmers; procure the produce; run a petrol bunk; construct a godown/warehouse and enable a farmer to store the produce; set up a retail store and market the produce at a vantage price for the farmer. It can also set up processing plants and add value to the produce. These multiple activities cannot be performed by the DCCB. Nabard’s Development of PACS Project has incentives for multifunctional PACS.

All that is required is investment in PACS for efficient management and secretarial support that can come from the Apex Bank than the DCCBs. Direct transmission of funds from the Apex Bank to the PACS will bring gains to the members by way of reduced interest rates and effective supervision. PACS, if starved of resources, can opt for affiliation to a commercial bank without sacrificing the principles of cooperation and within the provisions of the State Cooperative Act. PACS can also directly implement both life and crops insurance schemes.

Reforms of the computerised short-term rural cooperative credit structure through a two-tier cooperative structure in the State will reinvigorate them. But such reforms should be through better law and governance. The Telangana government took the lead to conduct elections to PACS by the State Election Commission as suggested in the 97th Constitution Amendment Act. If these cooperators are by law excluded from entering legislative bodies during their elected term then they have the prospect of moving to effective governance.

In the context of commercial Banks slowly moving away from the rural areas on viability considerations, and customers dissatisfied with their services, cooperatives emerge as the best option.

Cooperatives As Best Option

Commercial banks are slowly moving away from the rural areas on viability considerations and customers are as dissatisfied with their services. In this context, cooperatives emerge as the best option. In an era of regulatory rigour and high capital adequacy norms under Basel III, Urban Cooperative Banks (UCBs) in the existing format cannot afford to be competitive and extend the intended service to the members.

UCBs have to be tech-savvy and put in place the needed cybersecurity systems on a par with commercial bank branches and size is the essence of it. Therefore, UCBs should consolidate, capitalise, and close unviable entities. Members as owners of UCBs should be able to refurbish capital required and there can be no recapitalisation as in the case of PSBs.

But governance holds the key. Management should be professional at the PACS level with no patronage in staff appointments to PACS and the board members should be trained in oversight.

(The author is an economist and former Member of RBI Expert Committee on Short Term Cooperative Credit Structure — 2012)