Co-operative sector: Kerala should revamp its scam-tainted credit societies

co-operative sector
Bringing co-operative sector under the Banking Regulation Act will be counterproductive as it will devoid the credit societies of flexibility and functional autonomy.

One institution that worked wonders towards Kerala’s emergence as a ‘model of development’ is its co-operative sector. Free from the rigidities and red tape associated with scheduled commercial banks, the network of over 15,000 service co-operative credit societies function as people’s banks for all practical purposes. Though Reserve Bank of India (RBI) always frowned upon co-operative credit societies assuming the role of banks, the ‘co-operative banks’ of Kerala somehow managed to resist the strictures of the RBI all these years. By and large, these ‘banks’ have been performing the banking functions to the satisfaction of both depositors and borrowers.

The vibrancy of Kerala’s rural and semi-urban economy owes a lot to the co-operative sector. Local people could always depend on them in their hour of need. Whether it be small farm loan, gold loan or bigger loans for migration to Gulf countries and house construction, the local cooperative bank was the last resort.

The strength of the co-operatives was the committed individuals who wielded enormous popularity within the local community and also the hardworking employees who were largely recruited locally. It was this synergy that ensured reasonable repayment performance in many cases of risky loans. Because of their credibility, the local people deposited their savings with the cooperative banks rather than the scheduled commercial banks. Of course, the slightly higher interest rates they offer is also an attraction.

Gone are those days of the co-operative movement in Kerala. After being rocked by a series of scams such as the one involving the Karuvannur Co-operative Bank in Thrissur district, the co-operative sector in the state is facing a trust deficit. The acts of a few self-serving individuals have now begun to erase the credibility of a whole sector which is the backbone of Kerala’s rural and semi-urban local economies.

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Politicisation of the co-operative sector

The root cause of the present malaise is the excessive politicisation. Well-meaning and committed individuals in the sector find the going tough and are being replaced by individuals whose interest is political power and positions. This has a corrupting influence on the local community and the ‘rules of the game’ are rewritten in many co-operatives to serve this objective.

Politically appointed employees colluded with their masters in many fraudulent transactions. In the process, the institutional mechanism for ensuring financial and technical viability of projects collapsed. Some of the widely prevalent practices are extending loans in the name of non-existing persons, loans in the name of depositors without their knowledge, siphoning off money from dormant accounts, and passing loans to near and dear without pledging anything as collateral security, and irregularities in the auction of collateral securities.

In his reply to a query in the Kerala assembly on July 18, cooperation minister VN Vasavan revealed that a total of 399 cooperative banks and societies across the state have reported financial irregularities. He also informed that 164 co-operative institutions across the state have failed to refund deposits on maturity. A thorough audit of co-operative credit societies across the state may bring out many more such cases.

The department of co-operatives is equally responsible for the current state of affairs. The department is mandated to conduct annual audits in all co-operatives. It is inconceivable that the auditors did not point out these irregularities in time. If the Registrar of Cooperatives, the highest authority of Cooperatives in the state, had brought these to the notice of the higher-ups, the current crisis could have been averted to a large extent. It seems that the Registrar of Cooperatives too succumbed to political pulls and pressures.

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A sector badly in need of revamp

Of late, the cooperative sector is undergoing challenges one after the other — note ban, flash floods, Covid lockdown and the resultant economic crisis. On top of it, the government of India is trying to bring the cooperative sector under the Union cooperative ministry.

Amid these challenges, the cooperative societies are struggling to stay afloat by seizing whatever opportunities that come by to engage with the local communities. Their role in flood rehabilitation projects, care home projects, Covid compensation, and the distribution of welfare pension are praiseworthy. The damage to their reputation caused by the actions of a few unscrupulous individuals cannot be allowed to spill over the entire sector. The state government should take immediate measures for a thorough makeover of the cooperative sector.

Based on the recommendations of a nine-member committee constituted to study the Karuvannur scam, the government has decided to amend the cooperative sector laws incorporating enabling provisions to prevent frauds. The draft law recommends charging criminal cases parallel to departmental enquiry when fraud occurs in a cooperative institution. It may be simplistic to think that a few amendments and provisions in the Act can fix the problem. The problem lies with people who sabotage provisions in the law.

The first and foremost step should be freeing the sector from the dominance of politicians and political parties. The recommendation to include professionals in the director board of cooperatives is a step in the right direction in so far as it can prevent malpractices in the valuation of assets pledged for granting loans. Along with this, there is an urgent need to infuse professionalism in the sector. Both in recruitment and training of staff, a merit-based professional approach must be pursued.

Need measured regulation

The RBI has, on several occasions, warned the cooperatives about using the word bank in their names and accepting deposits from non-members/ nominal members/associate members. This is tantamount to conducting banking business in violation of the provisions of the Banking Regulation Act, 1949. Due to this, the deposits with the cooperatives do not enjoy insurance cover from Deposit Insurance and Credit Guarantee Corporation. The ruling Left Democratic Front government is of the view that such stringent regulations will impact the functioning of the co-operative sector in the state.

In the backdrop of the scams, it may appear that the solution is stringent control of cooperatives by the RBI. But bringing cooperatives straight away under Banking Regulation Act may amount to throwing the baby out with the bath water. The Kerala experience has shown that cooperatives have a role which is fundamentally different from that of scheduled commercial banks. Any regulations that remove the flexibility and functional autonomy of cooperatives will be counterproductive. The scams have offered Kerala society an opportunity to find a democratic solution to the present crisis.

(Dr Jose Sebastian is an economist based in Thiruvananthapuram. He was a senior faculty at Gulati Institute of Finance and Taxation.)