Developments in Cooperative Banking Sector

R Mitra/J Abraham

RURAL credit cooperatives were born more than a hundred years ago and have been decisive in providing agricultural credit, especially to small and marginal farmers and to agricultural workers. As on March 31, 2013, the short term credit cooperative structure (STCCS) comprised 92,432 primary agricultural credit cooperative societies (PACS), 370 district central cooperative banks (DCCBs) and 31 state cooperative banks (StCBs). Though cooperatives are providing only 17 percent of agriculture credit, their share in total number of agricultural accounts held by the banking system is substantial. Cooperatives provided agricultural credit to 3.08 crore farmers during 2011-12, compared to only 2.55 core farmers for commercial banks and 82 lakh by the regional rural banks (RRBs). These included 67 lakh new farmer financed during 2011-12, compared to 21 lakh for commercial banks and nine lakh for RRBs. Cooperative exposure to small and marginal farmers is 66 percent out of its total loan portfolio, far better than commercial banks’ exposure to these categories at 55 percent. It is interesting to note that per account loan disbursed by cooperatives was Rs 28,467 (2011-12), compared to Rs 1.15 lakh for commercial banks and Rs 66,000 for RRBs. This signifies that cooperatives are supporting more people of the neglected, weaker and excluded categories of small and marginal farmers. These, as in 2010-11, accounted for close to 85 percent of total landholdings and 44 percent of total cultivable area in our country. Also, compared to commercial banks and RRBs respectively, the share of cooperatives in term deposits was about 10 percent and 17 percent higher.

Based on the recommendations of Dr Prakash Bakshi’s report on short term cooperative credit structure, the National Bank for Agricultural and Rural Development (NABARD) issued a circular on July 22, 2013, advising all the state and district level cooperative banks that the PACS (base level of the three tier short term institutional credit delivery system) must be made to function as business correspondents (BCs) of the middle tier, i.e. district central cooperative banks. But this would mean abolishing the independent status of the PACS which are the most important and vibrant financial institutions at village level in meeting the credit needs of the peasants. Several committees have so far affirmed the unique role of PACS; these included the latest Dr Nachiket Mor committee on comprehensive financial services for small businesses and low income households. Yet there is a deliberate attempt to weaken the institutional agri-credit structure while the need of the hour is to strengthen it by all means.

Among the three tier structure for short term credit, state and district level bodies have on the whole shown marked improvement on the parameters of profitability, recovery and reduction of non-performing assets in recent years, whereas the lowest tier (PACS) is beset with some problems. On the whole, 28 out of 31 StCBs, 318 out of 370 DCCBs and 45,433 out of 92,435 PACS were in profit as on 31 March, 2013 according to the RBI’s Report on Trends and Progress of Banking in India 2012-13. It is also known that, with a right mix of operating climate and institutional and credit support from the government, RBI and NABARD, around 72 percent of the PACS can become viable. However, the central government recently stopped giving fund support to cooperatives, especially to PACS, on the plea of financial burden and in its zeal to control the fiscal deficit.

Also, the sustainability of DCCBs and StCBSs largely depends on the lowest tier’s sustainability. So any artificial separation of the PACS from the top two will weaken the structure as a whole. The RBI-NABARD argument is that PACS are no banks and cannot issue Kisan Credit Cards (KCCs) which are Aadhar card linked and information and communication technology (ICT) enabled. Moreover, if PACS are made to function as BCs of the DCCBs and StCBs, their deposits and loans can be covered only under the insurance cover of Deposit Insurance and Credit Guarantee Corporation (DICGC). But these are mere alibi, as alternative arrangements for DICGC insurance cover can be easily made as was done in Kerala and elsewhere. A detailed alternative suggestion on this issue also came in 2011 from the Working Group appointed by the Planning Commission, to which we would return later. Finding a technological solution to the problem of integrating the PACS with the ICT enabled platforms is quite possible if the government, RBI and NABARD are willing for it. This was what the Vaidyanathan committee recommended.

The Bakshi committee also recommended that the authority to remove the board of the StCBs and DCCBs needs to vest solely with the RBI, thus seeking to ensure overriding powers for the RBI. This may seriously weaken the federal structure of our polity, as cooperation is in the state list of the constitution of India.

The move to weaken the PACS is also an attack on the peasantry and other rural people, leaving these sections left at the mercy of usurious moneylenders, micro finance institutions (MFIs) and chit funds that are mushrooming in the countryside and semi-urban areas. (At present, at the level of PACS, these sections are nine crore strong, out of which 4.2 crore are borrowing members.) This can have only disastrous consequences, as evident from the sordid scandal centring round Saradha Group in West Bengal. This move is part of the government of India’s ‘reforms’ for intensifying the corporatisation of agriculture, to enable the big capital to establish its predominance over the vast agricultural credit sector, to the detriment of the small, middle and marginal farmers in particular.

Despite the Vaidyanathan committee’s recommendation to grant substantial fund support for the revival of long term cooperative agri-credit structure, the centre is only dillydallying, forming committee after committee, without any tangible decision so far. One can well understand the importance of this structure for our country, and the prime minister himself has lamented the declining fund support on occasions. The government needs to take an immediate positive decision on such fund support to revive this sector for the long-term credit needs of Indian agriculture. This was also highlighted by the Planning Commission’s working group for the 12th plan on outreach of institutional credit, cooperatives and risk management in 2011.

We recall: a high-power 26-member working group under Dr Y S Thorat, former NABARD chairman, submitted its report to the Planning Commission in November 2011. Its terms of reference were as below.

1) To review the flow of credit to agriculture and allied sectors during the 11th plan and to recommend measures to ease the flow of credit at reasonable rates of interest throughout the country, with special consideration of disadvantaged sections such as small and marginal farmers, women farmers, tenants, oral lessees and landless labourers, and to assess the agri-credit requirements during the 12th plan.

2) To review the performance of credit cooperatives in providing credit to agriculture and allied activities, and to recommend measures for their increased proactive participation.

3) To study the performance, efficacy and adequacy of risk management policies, strategies and programmes being implemented for the agriculture and allied sectors, and to recommend the course to be followed in the 12th plan.

4) To study the micro financing institutions, their costs and rates of lending, their contribution in credit outreach, and to recommend future course of action.

The group carried out a detailed study on the issues in consultation with various stakeholders including the state governments and came out with several recommendations. Though its overall direction is broadly in sync with the neo-liberal policies being followed in our country, the otherwise well researched report contains certain important recommendations that to an extent reflects the demands of the democratic, cooperative, peasant and trade union movements.

Firstly, the group clearly pointed out the maladies associated with increased credit distribution since 2004, and talked about credit deepening instead of only credit widening strategies, so that the eight crore farmer households who still remain outside the formal credit coverage can be brought into it fold.

Secondly, it highlighted the emerging evidence of regional imbalances in credit flow --- term lending taking a back seat, sluggishness in the share of small and marginal farmers, dilution in synchronisation of credit flow with agricultural seasonality, increase in share of indirect finance, poor monitoring which is unable to decipher the direction of credit flow etc. Incidentally, NABARD’s annual report 2012-13 also points to this imbalance vis-à-vis the needs of agriculture. For example, in the 11th plan, the entire eastern region's share in the country's total agri-credit was barely 7.27 percent though these states account for nearly 14.65 percent of gross cropped area (GCA) and 15.25 percent of gross irrigated area (GIA), and have an average crop intensity of 151. On the other hand, the southern region with average crop intensity of 124, 18.68 percent share in GCA and 16.36 percent share in GIA got 37.55 percent of the total agri-credit. Similarly, the credit shares of the northern and western regions are not in step with either crop intensity or with GCA and GIA.

Thirdly, the WG discussion on the emerging agrarian structure being heavily tilted in favour of 'small farming' has important implications for the credit strategy. It laments that credit dispensation to these categories of farmers by banks, including the cooperative banks, was at best sluggish. This disequilibrium, according to WG, posits the need to address the factors which constrain small-scale farming and to suggest suitable and equitable forms of adequate and affordable credit flows. However, the WG seeks to promote cooperative farming along with contract or corporate farming. This can only be self-defeating as it would adversely affect the credit needs of small and marginal farmers or landless labourers.

Fourthly, the WG has clearly spelt out the fact that cooperative banking model (both short and long term) needs to be strengthened financially. This needs larger doses of refinance from NABARD too, to handle a share of at least 30 percent of total agri-credit disbursal of roughly Rs 37 lakh crore in the entire 12th plan period.

Fifthly, it calls for strengthening the PACS and broadening their mandate to transform them into “one stop shops” for farmers, by diversifying their products and services. It quotes the example of Punjab where some PACS maintain a stock of tractors and other farm machinery which can be hired by farmers. This model, according to WG, is found to be highly successful as the farmers are relieved from the stress of having to buy the equipment from the market at high costs. This model can be replicated in other states with suitable modifications. This may also help in evolving a suitable model of aggregation including cooperative farming.

Sixthly, while suggesting various models for improving the deposit base of PACS, the WG called for immediate sanctioning of the scheme drawn by NABARD, named Institutional Protection and Deposit Safety Scheme (IPDSS), by the ministry of finance on the lines of similar schemes operating in Germany and Hungary. This may act as a substitute to DICGC cover for the PACS. This, if implemented, will go a long way to address the problem of protection of PACS deposits and may renew the farmers’ confidence about keeping their savings in the PACS.

The WG also called for strengthening the resource base of NABARD, increasing the public investment in agriculture and rural infrastructure, and forging the risk mitigation strategies for farmers like improved insurance cover, minimum support price, etc.

On the whole, despite several weaknesses, the WG report provides ample ground to demand increased credit at favourable terms to disadvantaged sections of farmers, strengthening of cooperative banking structure including the PACS and its increased role in dispensation in rural credit, more stress on direct and long term credit rather than disproportionate emphasis on indirect and short term credit, stress on MSP as a vital tool in achieving food security etc.

All the cooperative banks including the State Cooperative Agricultural and Rural Development Banks (SCARDBs), Primary Cooperative Agricultural and Rural Development Banks (PCARDBs) and Urban Cooperative Banks (UCBs) were exempted under income tax Act 1961 under section 80(p). But in the union budget 2006-2007, this exemption was restricted to only PACS and PCARDBs from the fiscal 2007-08. This brought the StCBs, DCCBs, UCBs etc within the income tax net. The tax exemption should be reintroduced for making cooperatives financially viable.

The urban cooperative banks (UCBs) cater to the needs of middle class and weaker sections of urban areas and most of their loans go to non-agricultural priority sectors. These banks are mostly solitary organisations, without branches. Overall, their functioning showed marked improvement in recent years despite the challenging environment. This was admitted by RBI in its Report on Trends and Progress of Banking in India 2012-13. Their independent entity must continue without any attempt to merge them with private Indian or foreign banks.

However, in case of UCBs, the picture is not that rosy in West Bengal. At least, three UCBs here stand either closed or delicensed due to bad management practices. Undue political interference is leading to an uncertain future for their staff and other stakeholders. Insofar as overcoming the problems of UCBs was concerned, the erstwhile Left Front government was the only state government in India that accepted the Asok Bandopadhyay recommendations and provided an equity support of Rs 169 crore for a turnaround of the UCBs. The Left Front government also agreed to release more money in phases, depending on fulfilment of certain parameters. However, after the regime change in West Bengal, the present TMC run state government has refused to grant any money to the UCBs and thus put them in a dire strait. The state unit of the Bank Employees Federation of India has stood by the staff and stakeholders of these UCBs, and organised a series of actions. The BEFI also extended a token amount of financial support to the distressed UCB employees and is also taking care of the necessary legal steps to fight for their just cause.

Ever since the TMC came to power in West Bengal, a no holds barred attack is being launched on all democratic bodies including cooperatives. The attack has a deep design to weaken these people-run banks to pave the way for MFIs and chit funds like the now infamous Saradha and other groups. This means robbing the poor people off their precious, life-long savings. The TMC regime's attempts to weaken the cooperative sector through anti-constitutional measures have invited repeated rebuffs from courts including the Kolkata High Court. But the government is yet to give up and goes on with its desperate attempts to emasculate the cooperative sector. Democratic forces in the state are seeking to forge an all-out unity against these monstrous attacks on cooperative sector in the country in general and in West Bengal in particular. The RBI, NABARD and the central government too have to intervene in order to stop this menace.

The Bank Employees Federation of India and All India NABARD Employees Association (AINBEA) have individually and jointly taken several steps to address the problems facing the cooperative banking sector and its employees. These also include financial issues like superannuation, uniform pay scale etc. The recent initiatives include sending a joint BEFI-AINBEA delegation, led by Basudeb Acharia, to and detailed discussion with Sharad Pawar, the union minister for agriculture and cooperation, at Delhi in December 2013. The minister agreed not to implement the controversial NABARD circular of July 22, 2013 and informed that the government had already written to Basudeb Acharia about it. He informed that NABARD had issued a revised circular on September 6, 2013, amending its earlier circular on the issue. On the issue of technological linking of the PACS with the national payment system, he agreed to examine the BEFI-AINBEA proposal favourably. The delegation strongly raised the issue of exemption of cooperatives from income tax. The ministry officials informed that they had been taking it up with the finance ministry before every budget and that they would do it more strongly this time.

The AINBEA had also forwarded a detailed study report and its suggestions on improving the institutional rural credit to the parliamentary standing committee on agriculture, headed by Basudeb Acharia. The committee called the AINBEA for official deposition at Delhi in January 2014. The AINBEA also approached the parliamentary standing committee on finance to lodge protest against the NABARD Amendment Bill 2013 and of late against the RBI appointed Dr Nachiket Mor committee recommendations. It submitted detailed alternative documents, as the former will significantly alter the parliamentary mandate with which the NABARD was formed in 1982. These initiatives also included protest demonstrations, dharnas in front of the parliament, strikes etc. In the coming days these actions need to be bolstered and synchronised with kisan organisations in order to save the cooperative rural credit and Indian agriculture.

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