Tread with caution

Nabard move on credit societies may backfire

The proposed initiative of the National Bank for Agriculture and Rural Development (Nabard) to help primary agricultural credit societies (PACSs) improve their fiscal health through deposit mobilisation is laudable, even though there could be doubts about its effectiveness. Nabard has proposed an institutional protection and deposit safety scheme for PACSs to attract more deposits from their members. The current lack of depositor confidence is largely because the deposits in these societies do not enjoy the protection ensured by the Deposit Insurance and Credit Guarantee Corporation. Though several states have launched deposit insurance schemes for the cooperative sector, including PACSs, these are largely non-functional. The collapse of several cooperative banks in recent years, moreover, has further eroded the depositors’ trust in PACSs already suffering from a low and inadequate capital base. Most of these societies were originally formed under the state-sponsored initiatives with each member holding just one share of the face value of Rs 10, or at the most Rs 100. In most cases, even that money was paid by the states. An added disadvantage of the low equity participation and deposits by the members is that they hardly have any stake in the successful operation of PACSs. All this adversely affects the performance of these grass-roots cooperatives.

That said, the bitter truth is that even if the enhanced security of PACSs leads to higher deposit mobilisation, this alone may not be enough to adequately expand their resource base. Nabard intends to address this weakness by converting PACSs into one-stop shops dealing in farm inputs and helping them to take up new businesses, such as warehousing, leasing out farm equipment and providing e-enabled services for dissemination of information on weather, market prices, technical advice and land records. Interestingly, these ambitious proposals are said to have been modelled on the lines of similar successful business enterprises undertaken by primary cooperatives in Germany and Hungary. They may also have been encouraged by examples of some well-run and cash-rich Indian cooperatives, such as Iffco, which have ventured into fields wholly unrelated to their primary activity and yet made a success of it. But it is not realistic to expect the tiny, poorly managed and problem-ridden PACSs to emulate the exotic or big local cooperatives.

What needs to be recognised is that several of the proposed ventures require special managerial skills, which most PACSs lack. Besides, PACSs would also need deep pockets not only for initial investments but also for bearing business losses in the first few years of operation before their new initiatives become financially viable. Therefore, besides carrying out structural reforms to address these issues, Nabard will need to undertake a major exercise in capacity building of PACSs before letting them take the risk of entering unfamiliar enterprises. Moreover, the programmes already initiated for revitalising PACSs, which are either lying defunct or performing below their capacity, need to be speeded up. Till that time, Nabard would perhaps be well-advised to tread with caution on implementing its plan.