Rescuing co-ops

The announcement by Finance Minister P Chidambaram that a financial package for revamping the co-operative banks is ready and will be announced after the cabinet's clearance will provide little comfort to the beleaguered co-operative credit sector. The Rs 15,000-crore proposed package is hardly new and has been talked about for years. Besides, the Vaidyanathan committee report, which is believed to form the basis for the package in its latest avatar, is in itself controversial. The co-operative banking sector has categorically rejected it in its present form. Some state governments have also voiced their disquiet over some of its suggestions, especially those concerning denial of any powers to the states over these institutions. Further, the proposal that the state governments and the co-operative institutions contribute part of the assistance is likely to be stoutly resisted by both. The Vaidyanathan committee has envisaged that the Centre will shoulder the largest financial burden by giving its share of the assistance as grant and providing soft loans to the state governments and the institutions to enable them to contribute their share of the resources. But the fragile financial health of most states, not to speak of the co-operatives, is unlikely to allow them to accept even soft loans for this purpose. If such issues actually block the revamping of this vital dispenser of rural credit, it will be most unfortunate. Co-operative credit was originally conceived as the prime source of rural credit. But due largely to the malfunctioning of these institutions for various reasons, the share of this sector in total rural institutional credit has dropped from 60 per cent in the early 1990s to a mere 27 per cent now.

The deterioration in their functioning has been rather rapid in the current decade, as indicated by the spurt in non-performing assets from 18.8 per cent in 1999-2000 to over 26.6 per cent by 2003-04. However, it will be unfair to blame the co-operatives alone for this dismal state of affairs. In fact, the root of the malaise lies in political (including government) interference in their functioning. The promise of interest waiver and capital restructuring made last year by political parties and even the state and central governments in the wake of a poor monsoon, coming on top of the ill-conceived loan waiver move of the late Devi Lal, have dealt a crippling blow to co-operative credit institutions. These moves have managed to bring down the loan recovery rate to a mere 16 per cent in 2004-05 from 43.4 per cent a year earlier. What the co-operatives really need is functional autonomy (read insulating them from political interference) and professionalism. Of course, they also need to adopt good banking practices as laid down by the Reserve Bank. But most importantly, they need to get rid of their de facto masters, the political bosses, and serve the needs of their de jure masters, their shareholder members. By serving shareholder interests they will be able to do greater justice to good banking practices. Reforms are also needed in the way refinance reaches down to the grassroots co-operative institutions through the present multi-layered structure. Currently, this pushes up the cost of finance. The proposed package will, therefore, do well to link the financial assistance with cooperative sector reforms to enable these institutions to function professionally and thereby become viable entities.