Poor States May Derail Co-Op Revival Plan

The Rs 800 crore revitalisation package recommended by the high power committee (HPC) for co-operative credit institutions could prove to be a non-starter as some of the states such as Maharashtra, Gujarat, Orissa, Uttar Pradesh and Rajasthan are cash strapped. Empty coffers and yawning deficits are set to derail the scheme.

However, Bihar despite its financial woes, has indicated to the Centre its willingness to put in money as all the distirct central co-operative banks (DCCBs) in the state have become Section 11(1)A companies under the Banking Regulation Act (implying that their net worth has been completely eroded). As per the latest data, collectively the 25 odd DCCBs in the state have an accumulated loss of Rs 300 crore and they may get their banking licences cancelled by the Reserve Bank of India (RBI).

 

Except for the north eastern (NE) states and Jammu & Kashmir, all the other states might find it difficult to pitch in with their 40 per cent funds contribution under the package, sources familiar with the developments said. In the case of the seven NE states and J&K, they have to contribute only 10 per cent of the revitalisation amount while 90 per cent will be contributed by the Centre.

The revitalisation package entails placing the revitalisation amount, which is to be contributed by the Centre and the states in a 60:40 ratio, with the Reserve Bank of India (RBI) and issuing seven year non-statutory liquidity ratio (non-SLR) bonds in favour of the DCCBs.

The bonds received by the select DCCBs would have to be allocated to the targeted primary agricultural co-operative societies (PACS) in accordance with their respective shares as determined under the rehabilitation package.

"PACS have been chosen for revival, as by cleansing their balance sheet the outstanding amounts owed by the DCCBs can be cleared. The DCCBs can in turn clear their outstanding dues to the state-level apex co-operative bank," sources averred.

The scheme is a self-liquidating scheme whereby beneficiary co-operatives will only derive the benefit of interest income (8.5-9 per cent), which in turn will improve their profitability. The bonds will be extinguished over a period of five years (20 per cent each year) with an initial moratorium of two years.

"Notwithstanding the fact that the scheme will not involve large outflow of funds from the central/state governments (the outflows being restricted to periodical payment of interest on the bonds issued) the moot question remains whether the state governments have the wherewithal to chip in with their 40 per cent contribution given the fact that most of them are not exactly in the pink of their financial health," an expert from the co-operative sector pointed out.

In fact, at the HPC's deliberations a suggestion was proffered that such bonds should qualify as SLR investments so that they could be liquidated in the secondary market and there could be immediate cash infusion into the co-operatives. But fear of diversion of funds lead to the proposal being shot down.

The revitalisation package envisages that PACS should be the central point of all transformation process. It points out that pinpointed attention and forceful directions should be given for attaining sustainable viability at the grassroot level.

PACS woes include -- financial margins are inadequate to generate income enough to defray costs; credit business is almost stagnant due to lack of diversification; poor recovery; high management cost; investments in shares of various co-operative credit institutions having no returns but default risks; excess staffing; frauds/embezzlements etc.