Cooperative credit

Nabard's move to slash interest rates on refinance for loans that are extended to cooperative banks, is essentially a belated bid to correct an anomaly in the banking system that has existed for far too long.

The reduction only brings the rates applicable to cooperative banks at par with those charged from commercial banks by refinancing institutions.

There was little justification in charging higher interest on rural credit compared to that for other sectors. With this cut, cooperative banks too will be able to reduce the cost of credit to farmers.

However, this is not sufficient to end the woes of the cooperative credit network or of the farmers depending primarily on this network for their credit needs.

Nor will it ensure the smooth flow of finance in the rural sector. That requires an efficient credit delivery system that the cooperative sector, unfortunately, lacks.

Barring a few exceptions, India's cooperative credit institutions, be they banks or credit societies, are in bad shape, and unable to deliver to their true capacity.

Not only are a large number of cooperative banks on the sick list, even those in operation are beset with formidable problems.

These include inadequacy of refinance, low loan recovery, lack of professional management and the issues related to non-performing assets, besides political and bureaucratic interference.

None of these problems is of recent origin but little has been done in the past to solve them. Even the important announcements made in Budget speeches for revamping the cooperative credit structure have remained mostly unimplemented.

The package for revitalisation and recapitalisation of ailing cooperative banks is a case in point. The Budget for 2002-03 had proposed a recapitalisation scheme for them and even made a token provision of Rs 100 crore.

But it seems to have been forgotten that the Budget speech for 2003-04, too, did not mince words in expressing concern about the dismal delivery system in this sector.

The interim Budget for 2004-05 has, in fact, gone a step further by once again mooting a Rs 15,000-crore revitalisation package for the cooperatives. Considering the past track record, it is not difficult to predict the fate of this proposal too.

In fact, the chances of its implementation are even dimmer. For, its commencement has been linked to establishment of a "revised regulatory framework" (which is bound to take time) and the money is to be shared by the Centre and the states (which are unlikely to be willing to do so).

This aside, the recommendations of several committees, including the Vikhe Patil committee on revitalisation and the Reserve Bank's task force on cooperative credit headed by Jagdish Capoor, have been gathering dust.

As if these reports were not enough, another committee, headed by the economist V.S. Vyas, has now been proposed in the 2004-05 Budget. Is this an effort to buy time, or is the government serious about tackling the issue?