World Food Day [Part 3]

By Dr. Amrit Patel:

Revival Package: Government of India announced agricultural credit policy in 2004 to double the flow of credit to agriculture within three years. However, despite the phenomenal outreach the health of cooperatives continued to deteriorate. They are experiencing problems viz. low resource base, high dependence on external funding, excessive Government control, dual control, huge accumulated losses, regional imbalances, poor business diversification, poor recovery etc.

Government in 2004 appointed the Vaidyanathan Task Force to address the issues and suggest a Revival Package for Short Term Cooperative Credit Structure [STCCS] in the light of competitive role of cooperative credit institutions. The report on revival package accepted by the Government in 2006, besides reviving the STCCS to make it an efficient medium to serve the rural credit needs, seeks to

1. recapitalize cooperatives by providing financial assistance to restore their health
2. introduce legal and institutional reforms necessary for its democratic, self-reliant and efficient functioning and
3. take measures to improve the quality of management.

Recommendations, inter alia, on recapitalization of cooperatives, cleansing their balance sheets and adoption of prudential norms are under implementation. The progress so far indicates that:

• Twenty six States, almost covering 96% of the STCCS in the country, have executed the MoU with the GOI and NABARD for implementing the revival package
• Special audits of the units were completed in 80,639 PACS across 25 States to arrive at the precise amount of losses after factoring in prudential provisioning norms and the sharing pattern. The special audits of DCCBs and SCBs were completed in 10 States
• The participating States are required to amend their Cooperative Societies Act [CSA] for securing democratic character and autonomy of cooperatives and for their regulatory control by RBI. Twenty-one States have amended the Act and rules and bye-laws of the societies are being revised
• common accounting system [CAS] and MIS developed for PACS is underway in 16 States. Training on CAS/MIS has also been initiated.[v] Computerization of PACS is in progress in Andhra Pradesh, Haryana, and Tamil Nadu
• As on 31 March 2011, training for capacity building has been imparted to 81,037 secretaries of PACS from 18 States, 1,12,354 elected Board Members of PACS from 14 States, 368 CEOs of DCCBs from 16 States, CEO of SCB in six NER states and 2047 Directors of DCCB/SCB from 14 States. Besides, 70,899 PACS functionaries and 4173 bank supervisors/departmental auditors were trained on CAS/MIS. New models are developed viz. [a] a five day in-campus orientation program for branch managers/senior officers of DCCB/SCB for business development and diversification [b] a new program on Business Development and Profitability for PACS secretaries
• for securing deposits by PACS a draft Institutional Protection and Deposit Safety Scheme is finalized and awaits GoI’s approval
•  The Union Government and 16 State Governments have released an aggregate amount of Rs.8993 crore and Rs.854 crore respectively for recapitalization of PACS.

Performance: Performance of PACS during the period [1994 — 2006] on account of NABARD’s initiatives and [2006- 2010] when revival package is being implemented showed that there has been improvement in memberships, owned funds, deposits and borrowings. While number of borrowers increased in 2010, outstanding loan remained the same. As on 31 March 2010, out of 94647 PACS, 40,936 PACS were in profit whereas 41,679 PACS were in loss, 3441 PACS dormant, 1665 PACS defunct and 1589 PACS saddled with other financial problems. The study showed that 65540 PACS were viable and 22372 PACS potentially viable.

During 2009-10 recovery performance of SCBs was good and modest for DCCBs whereas very poor for PCARDBs and SCARDBs. During 2009-10, SCB as a group earned an overall return of 7.39% while the cost of funds worked out to 5.30% resulting in a financial margin of 2.09% [excluding miscellaneous income of 0.82%]. The average transaction and risk cost of SCB worked out to 1.34% and 0.55% respectively. SCB as a group earned a net margin of 1.02% compared to 0.57% during 2008-09.The overall return on working funds of DCCB as a group was 7.52% while cost of funds was 5.05%, yielding a financial margin of 2.47% [excluding miscellaneous income of 2,57%]. The average transaction and risk cost as a percentage to working funds were 1.89% and 1.35% respectively. The DCCB as a group earned net margin of 1.80%. During 2008-09, 13 SCARDBs had positive net margin whereas remaining six had negative net margin. PCARDB in only four States had positive net margin.

Facilitating Environment

Implementation process of revival package for short-term cooperatives approved in 2006 is extremely slow. Besides, revival package can express its potential only when State Governments create facilitating environment to remove root causes responsible for continued deteriorating health of cooperatives identified by the Task Force, viz.

1. cooperatives never realized the enormous potential opened up by its vast outreach owing mainly to a ‘deep impairment of governance’
2. while cooperatives were originally visualized as member-driven, democratic, self-governing, self-reliant institutions, cooperatives have, over the years, constantly looked up to the State for several basic functions. In the process, State Governments have become the dominant shareholders, managers, regulators, supervisors and auditors of the cooperatives
3. concept of mutuality [with savings and credit functions going together] that provided strength to cooperatives, all over the world, has been missing in the country.
4. this ‘borrower-driven’ system is beset with conflict of interest and has led to regulatory, arbitrage, recurrent losses, deposit erosion, poor portfolio quality and a loss of competitive edge for the cooperatives
5. there is an impasse in the laws governing cooperative banking institutions in the country as cooperation is a State subject while banking activities are regulated by a Central Act.
6. cooperatives have poor quality of internal control systems, housekeeping and audit in addition to professionally not qualified human resources manning the cooperatives.

Only nine States have so far passed cooperative laws on lines of the Model Act as recommended by the Brahm Prakash Committee to enable the growth of cooperatives based on thrift and mutual help. The Model Act will provide cooperatives operational freedom and autonomy from the State Government while being required to be fully accountable to their members. Cooperatives registered under this Act cannot accept share capital from the State Government. The Task Force on Credit Related Issues of Farmers reported that thrift cooperatives of both women and men in Andhra Pradesh and Orissa were self-reliant, vibrant and financially strong. While State Governments and short-term cooperatives need to complete implementation of revival package in a year, the Government of India should accord approval to implement revival package for long-term cooperatives pending since February 2010 and its implementation should be completed in two years. Similarly, recommendations need to be implemented within two years on legal, organizational, management, functional and operational reforms, contained in the reports of the Brahm Praksh committee on Model Cooperative Act [1990], the Ardhanareeswaran committee on State Cooperative Act and the committee on financial sector reforms and cooperative banking [1994]. India has the potential to significantly contribute to the growth of rural economy through progressively establishing Credit Unions in relatively larger size villages and progressively converting all PACS as full-fledged branches of DCCBs that can be manned by professional trained by Institute of Rural Management, Anand and managed on sound principles of business.

Conclusion: There is need to form agricultural cooperatives on the lines of Anand Milk Union Limited [AMUL] in respect of Food Grains, Fruits, Vegetables, Meat, and Eggs progressively throughout the country during the twelfth and thirteenth five year plans integrating credit with supplies [of inputs and technology] and services [marketing and health] employing professionals trained by the Institute of Rural Management Anand. The Committee on All India Rural Credit in 1954 has aptly said “Cooperation has failed but cooperation has to succeed” Agricultural cooperatives with financial, managerial and professional competence can compete with private sector and contribute to feeding the world

Part 1

Part 2