Fixing the Rot in the Cooperative Sector

Syllabus: GS2/  Government Policies & Interventions, Indian Economy

In Context

• The Enforcement Directorate (ED) investigation was recently constituted citing financial irregularities in the Karuvannur Service Cooperative Bank of Kerala.

About the Cooperative Societies

• A co-operative society is a voluntary association of individuals having common needs who join hands for the achievement of common economic interest. 
• Its aim is to serve the interest of the poorer sections of society through the principle of self-help and mutual help. 
• The cooperative movement is as old as India’s Independence. 

The Union Ministry of Cooperation was formed in 2021, its mandate was looked after by the Ministry of Agriculture before.

Cooperative Banks in India

• Cooperative banking refers to a small financial institution started by a group of individuals to address the capital needs of their specific community. 
• Such financial institutions are owned and controlled by their members.
• Co-operative banks play an integral part in the implementation of development plans and are important for the effective functioning of the banking system in India.

97th Constitutional Amendment Act 2011

• It established the right to form cooperative societies as a fundamental right (Article 19).
• It included a new Directive Principle of State Policy on the Promotion of Cooperative Societies (Article 43-B).
• It added a new Part IX-B to the Constitution titled “The Co-operative Societies” (Articles 243-ZH to 243-ZT). 
• It authorizes the Parliament to establish relevant laws in the case of multi-state cooperative societies (MSCS) and state legislatures in the case of other cooperative societies.

Significance of Cooperative Banks

• Alternative Source of Credit: The rural population benefits from cooperative banking as they provide credit at a lower rate as compared to the money lenders who tend to provide credit at a higher rate of interest.
  • This protects the rural population from the monopoly of the money lenders.
• Encouragement to Savings and Investment: Cooperative banking has enabled the rural population to save more and invest rather than hoard money. This will have a long-term benefit on the money management of the rural population.
• Improvement in Farming Methods: Due to the lower interest rates of the credits provided by the Cooperative banks, the rural population can now utilise the same for better farming methods eg: purchasing seeds, chemical fertilizers etc.

Recent Issue in the Cooperative Sector in Kerala

• The cooperative sector in the State has a two-tier structure.
  • At the apex level is the Kerala Bank, which was formed with the merger of 14 district cooperative banks. 
  • Hundreds of primary agriculture cooperative societies and urban cooperative banks make up the second tier.
• The loan scam of the Karuvannur Bank:
  • The loan scam at the Karuvannur Bank came to light when customers began complaining that they were lured into a debt trap by middlemen. 
  • The ED investigation later found that the middleman named as the main accused in the Karuvannur loan scam had laundered money through other cooperative banks too.
• Financial irregularities:
  • The rot in the cooperative sector became apparent when the government informed the Assembly that financial irregularities had been detected in 399 cooperative institutions over a period of six years. 
• Issues & criticisms:
  • All the societies and urban banks are controlled by local politicians with no professional expertise. 
  • Backdoor appointments are very common. 
  • The lack of a proper auditing mechanism and the absence of transparency in the functioning of cooperatives are other major failures responsible for the current crisis that has severely eroded the credibility of the sector.

Other Challenges Faced by India’s Cooperative Banks

• Financial Decline: 
  • In recent years, Urban Cooperative banks (UCBs) have witnessed a sharper decline in terms of both loans and deposits. 
  • The overdue loans of the cooperative institutions have been increasing over the years. 
• Lack of modern banking practices:
  • Co-operative banks lack modern banking practices like net banking, mobile banking, online banking, e-banking, ATM banking, and all other modern banking practices. 
  • Due to this, they have been eliminated and remain on the back foot in the modern banking industry.
• Limited resources:
  • The size of the cooperative banks is very small. Most of these societies only have a small number of members, and they only operate in one or two villages. 
  • As a result, their resources remain limited, which makes it impossible for them to expand their means and extend their area of operations.
• Dual regulations:
  • Co-operative banks have to follow regulations set by the RBI and their respective registrar of societies, which causes problems in coordination and management.
• Inadequate Coverage:
  • The membership of the rural population of cooperative banking is just 45%, hence the inadequate coverage is a matter of concern. It is restricted only to a few states like Gujrat, Maharashtra, Punjab etc.

Suggestions & Way Ahead

• Co-operatives have great potential to rejuvenate growth, formalise the economy, and reduce inequality besides improving the standard of living of the poor.
• With panic setting in among thousands of investors in cooperative institutions, quick-fix solutions cannot address the deepening crisis in the sector.
  • The government has to fix responsibility for the scam and ensure that the culprits are brought to book regardless of their political affiliation. 
• The system needs to be thoroughly overhauled.
  • Professionalism and a proper auditing system will have to be put in place to restore public confidence in the sector.