No soft options, please

The Vaidyanathan task force on cooperative credit, which had earlier recommended a financial package of Rs 14,839 crore for the rejuvenation of short-term cooperative credit institutions, has now come out with its second report recommending another Rs 4,839-crore package for long-term cooperative credit disbursers. The earlier report has already been accepted by the government and is about to be implemented, whereas the second report is still open for debate. Though both reports link the revival package to badly needed reforms in the cooperative credit sector, and restrict the aid to potentially viable cooperatives, there is room for hard questions and a lot of scepticism. It should not be that the government hands out Rs 20,000 crore merely because "cooperatives" sound good in the political lexicon.

India's cooperatives are beset with several weaknesses which render their operation as economically viable institutions extremely problematic. Unlike other countries where cooperatives dabble in both thrift and credit functions together, in India they deal mostly in credit at the primary level and refinance at the upper tiers. Such a structure tends to focus primarily on borrowers' interests, even at the cost of survivability.

Moreover, the regulation and supervision of cooperative credit institutions is weak due largely to the lack of accountability in a single, strong agency. Though cooperative banks are open to periodic inspection by Nabard, this rarely happens. So the Reserve Bank of India (RBI) is unable to ensure compliance with even the relatively diluted prudential norms applicable for this sector, and to take action against those in poor financial health. The additional problem is that the RBI's disciplinary sanctions on cooperatives can be enforced only through state governments. Since most cooperatives have strong connections with politicians, this usually means that nothing happens.

This apart, frequent government interventions (through loan waivers or repayment deferments) further erode the economic viability of this banking infrastructure. Indeed, it was the blow dealt to these institutions by the blanket loan waiver scheme of 1990 that triggered its decline. Consequently, the share of the cooperative sector in rural institutional credit has dropped from over 60 per cent then to merely one-third now.

This does not mean that cooperative credit institutions have no role to play. The commercial banks (which provide the institutional alternative) tend by and large to lend only to farmers with relatively large holdings: the average size of direct loans to agriculture by the commercial banks works out to Rs 31,585, against just Rs 6,640 per borrower in the case of cooperatives. If, therefore, the cooperative sector is allowed to fade out, it is the small and marginal farmers (who are the vast majority on the Indian farm scene) who will have to look for alternatives, and in many cases no satisfactory alternative may be available. But if there is a case to be made for persisting with promoting cooperative credit, it does not automatically follow that there is a case for government largesse""and certainly not on the terms now proposed by the Vaidyanathan committee, that even 50 per cent loan recovery should classify a cooperative bank as viable. Unless the non-productive assets of cooperative banks are brought at par with the ratios that exist in the commercial banks, any government hand-out will be only the first in a long line of such payments. Much better, then, to address the underlying problems today before handing out cash.