Rethinking rural cooperatives

In the past few years, the cooperative sector seems to have gained some policy attention. A few national-level cooperatives have been launched, such as the ambitious Bharat Taxi, which hopes to disrupt the duopoly of cab aggregators by aspiring to be an “Amul” in the cab segment. Most of the initiatives have been at national level though there are talks that new primary agricultural credit and primary milk cooperatives are being set up. 

However, we now need to look at the structure of rural cooperatives afresh, given the changed ecosystem and the players. The idea of a decentralised village-level financial institution as envisaged by policymakers after the submission of the All-India Rural Credit Survey Committee report in 1956 still holds as a concept. In fact, the first round of formalisation of rural credit happened through primary cooperatives and it was only in the second phase that nationalised banks with their branch-licensing policy and priority-sector lending went to rural areas. This was followed up by regional rural banks (RRBs), which were expected to be a professional entity with a local feel. 

In the past few years, there has been consolidation of RRBs. The RRB Act has also been amended to have a private-sector shareholder, and it is evident that the commercial imperatives of RRBs are taking them away from their extant focused agenda. In this context, we should not lose sight of hyper-local institutions that will continue to serve the last woman in the remotest village. This can happen through primary cooperatives. 

We do not have a clear estimate of how many rural primary cooperatives exist, after the National Bank for Agriculture and Rural Development (Nabard) stopped collecting and publishing statistics on credit and non-credit cooperatives in the country. At their peak we possibly had more than 100,000 primary cooperatives dealing in credit. Of those, possibly 60 per cent were active. It may be okay to assume that 40,000 to 50,000 primary cooperatives are active today. 

The problem with rural cooperatives is that they are very vulnerable and fail easily. Historically, they have been structured as “credit” cooperatives, which means they are fully leveraged and the governance structure contains members who are also borrowers. Such a structure is anathema to any banking institution, but the principles of cooperatives assume that members work for the common good. Apart from being leveraged, they suffer from portfolio concentration risks — with the portfolio focused excessively on agriculture; and from geographic concentration and resultantly the covariance risk of a force majeure event. 

The leverage of primary cooperatives makes them dependent on refinance from district cooperative central banks, many of which are in not great shape either. Those, in turn, depend on funding from state cooperative banks, and eventually refinance by Nabard. If we were to make these institutions vibrant, we need to learn from some of the successful models in Maharashtra, Kerala, Coastal Karnataka, some spots in West Bengal, and Telangana. Primary cooperatives in these areas have achieved success by diversifying their balance sheet to avoid the obvious risks. 

If we were to radically think about the rural cooperative structure and make rural cooperatives vibrant, possibly the following measures would help. 

Most of them have local deposits, which put local skin in the game, and they undertake non-credit trading activities, thereby diversifying income sources. These two buffers hold them in good stead in stress years. 

In the modern era of interconnectedness, middle-tier district banks do not add significant value, but they add significant overheads. They need to be integrated with the state cooperative bank to have one integrated professionally managed bank. This bank should not be managed as a “cooperative” bank but instead should be licensed as a specialised regional bank (SRB), with a mandate to be focused on cooperatives as far as the asset book is concerned. SRBs will deal with excess funds that the primaries might have and do financing to the entire cooperative structure  —  both credit and non-credit. The shares of SRBs should be issued only to cooperatives and cooperative-like institutions, including farmer producer organisations and other local institutions. However, governance and management should not be in accordance with the cooperative principle of “one-person (or one institution in this case) one-vote” but in accordance with the norms of the Reserve Bank of India with all the tests of independence and fit-and-proper done. 

The refinance an SRB provides for primary cooperatives should be brought down on a sliding scale from the current levels to about six times the member share-capital and non-withdrawable deposits (to be adequately defined with a tenor condition). Primary cooperatives should be encouraged to seek local deposits while undertaking non-credit functions as well — the primaries that have a strong balance sheet and can place an escrow amount in SRBs to access other banking facilities of remittance, interoperability and services like Unified Payments Interface, the debit card and even credit card for its members on a common brand. However, these facilities would be mapped to the balance sheet of the SRB. 

The Union or a state government may choose to put in a one-time grant to active cooperatives to revive them. If they are beyond redemption, it may be a good time for the state to actively promote cooperatives involving people and linking them to all the local financial activities, including primary milk-producer cooperatives and other payment systems. 

As Devesh Kapur and Arvind Subramanian point out in their recent book, we have had a precocious development at the apex and elite institutions, and it is time we got back to the grassroots. If we get to the grassroots now, we know that we have the financial and the technological power to manage housekeeping. It is high time we had vibrant self-governed, responsible grassroots financial institutions, particularly when RRBs are getting consolidated and they are rationalising their portfolios.

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The writer is a professor, Centre for Public Policy, Indian Institute of Management Bangalore