The proposal to make rural credit cooperatives the business correspondents of commercial banks will work only if the alliance is mutually beneficial.
The recent decision to use Primary Agricultural Cooperative Societies (PACs) to distribute crop loans to farmers by commercial banks in Maharashtra and the approval given by the Reserve Bank of India (RBI) and National Bank for Agriculture and Rural Development (Nabard) are welcome steps in the present context in which Maharashtra State Cooperative Bank has been superseded. This arrangement, however, has to be temporary and efforts must be made to strengthen credit cooperatives at all levels.
For quite some time, there have been discussions on the role of cooperatives in furthering financial inclusion, often suggesting field-level credit cooperatives and PACs to function as Business Correspondents (BCs) of commercial banks. Surprisingly, this model is considered beneficial to the PACs themselves. In a recently concluded conclave on financial inclusion at Mumbai (the 26th Skoch Summit), I argued that the large-scale involvement of PACs as BCs of commercial banks might prove detrimental to the PACs, depriving them of their cooperative character and reducing them to “agents” of commercial banks. What may be needed is an alliance between commercial banks and PACs that is mutually beneficial. The alliance, in the long run, should strengthen the credit cooperative structure. In a way, the alliance between banks and PACs should help the latter effectively address problems such as poor financial health and weak recycling of funds. This sort of alliance only can promote meaningful financial inclusion as also a diversified financial system resulting in greater financial stability.
Although the performance of the Indian banking system has been commendable during the last one and a half decade, large-scale financial exclusion has undoubtedly eclipsed the otherwise good performance of the banking system. It is now an accepted fact that financial inclusion, including the provision of credit at affordable cost, is a pre-requisite for inclusive growth. Although financial sector policies have long been driven by the objective of increasing financial inclusion, the goal of universal inclusion remains a distant dream. Notwithstanding the poor performance of credit cooperatives, it must not be forgotten that these credit cooperatives at the grassroots are functionally and ideologically best suited to rural India. This apart, financial inclusion minus grassroots credit cooperatives is simply unthinkable in the Indian context because of their sheer number and spread. The magnitude of financial exclusion has gone up during the last decade, the decade that witnessed a sharp fall in market share of rural credit cooperatives. One cannot remain oblivious to the fact that the deteriorating market share of rural credit cooperatives is closely linked to financial exclusion. Put it differently, the declining market share of cooperatives has resulted in large-scale exclusion and, therefore, credit cooperatives must be made active partners in promoting financial inclusion.
Everyone agrees and many argue that PACs numbering more than 100,000 should be used as BCs by banks. What needs to be debated is: is it possible to see PACs as BCs and also as grassroots credit cooperatives? The real challenge is to design an alliance in which banks would be the beneficiaries of thousands of outlets for financial services in rural India and PACs the gainers of financial inclusion in terms of the increased flow of funds and associated benefits. The broad contours of such a model are:
- PACs are allowed to act as BCs in its true sense — say, as “agents” for the mobilisation of deposits. Though the reputation of the PACs as financial intermediaries capable of handling public deposits is questionable, one can expect a fair degree of success in this regard as PACs will be mobilising and maintaining accounts on behalf of commercial banks.
- Depending on the success and capabilities of PACs, a portion of the deposits mobilised may be retained by these cooperatives. To the extent of deposits retained, the PACs could be given freedom in lending operations.
- Insofar as the provision of credit, a critical component of financial inclusion, is concerned, PACs will essentially perform the role of a BC, i.e., the credit risk is borne by the commercial banks. However, commercial banks may have to strengthen the risk-management capabilities of PACs to ensure that the deposits they retain are effectively recycled on the one hand and these cooperatives are enabled to take credit decisions independently, on the other.
- At the district level, the lead bank in consultation with the District Central Cooperative Banks (DCCBs) and the state government will have to take responsibility for identifying PACs for the alliance. Nabard funds under this alliance, especially for crop loans, will have to be channelled through the bank with which PACs are associated as a BC. DCCBs, which are federal bodies at the district level, should extend business support as also financial support to their member PACs from their own sources.
The approach outlined here may appear simplistic but it is pragmatic and must be seen against the backdrop of a large number of financially-weak PACs with vast geographical spread and large- scale financial exclusion. This arrangement speaks of the step-by-step approach to strengthen PACs on the one hand and on the other, effective utilisation of PACs for furthering financial inclusion. This arrangement also limits the default risk or risk of non-payment of loans by borrowers to the amount lent by PACs, which is inclusive of their own resources and the amount borrowed/deposits retained. A couple of experiments in Maharashtra might be in order before replication in other parts of the country.
The author is Professor, National Institute of Bank Management, Pune kramesha@hotmail.com