Cooperative Sector Reforms

• IAS NEXT, Lucknow
• 07, Dec 2021

Reference News-

‘Cooperation has failed, but cooperation must succeed,’ wrote the All India Rural Credit Survey Committee in 1954. 

• This verdict came five decades after the first cooperative legislation of 1904. The Governor of the Madras Presidency, Lord Wenlock, was the first to seriously attempt replicating European cooperatives in India.
• Madras was ideal for this experimentation as it had similar institutions in its Nidhis.

European Cooperatives

• Friedrich Raiffeisen, who along with compatriot Schulze-Delitzsch in Germany, and Luzzatti of Italy, pioneered cooperatives in Europe.
• Raiffeisen based them on the principles of self-help, self-governance, and self-responsibility. 
• Known for their trustworthiness and resilience against financial crises, most were known as Raiffeisen banks, spreading to other parts of Europe and America.

India Cooperatives & challenges

• Colonial Rulers while moving the Cooperative Societies Bill on October 23, 1903, had said that the Bill sought to create ‘small and simple credit societies for small and simple folk with simple needs and requiring small sums only’. 
• It was emphasised that ‘co-operation must be built up from the bottom, and not from the top’.
• However, what India had was not a movement, but a policy. It was ‘created by ‘resolutions of the Central Government’ unlike Europe.
• The challenge was to loosen government grip on cooperation over the years. But, government control has only increased, violating a core cooperative principle of political neutrality. This reflects a collective failure of the political class.
• After Independence, cooperative institutions became an instrument of planning and state action. 
• Not surprisingly, the most successful Indian cooperatives such as the AMUL, Indian Farmers Fertiliser Cooperative Limited (IFFCO) and Krishak Bharati Cooperative Limited (KRIBHCO), are outside government control.
• Globally, seven of the top 10 cooperatives by asset size are from the financial sector. The Indian financial sector is nowhere in the picture going by asset size.
• When a cooperative bank scales up, maintaining its cooperativeness is a challenge. Cooperatives have also become avenues for regulatory arbitrage, circumventing lending and anti-money laundering regulations.
• Cooperative banking suffered from the top-down quality. Recent initiatives such as an umbrella organisation for urban cooperatives and a new Ministry of Cooperation at the Centre threaten to further this approach in the absence of safeguards.

Measures to be adopted

1. Powers of Registrar of Cooperative Societies (RCS) need to be scaled back

• A British Indian innovation, it failed to stick to its original role of a facilitator: a friend, philosopher, and guide to cooperative societies. 
• In almost all States, the RCS has become an instrument of inspection and domination, one which imposes uniform by-laws, and amends them when individual societies do not fall in line.
• The RCS was empowered to grant exemptions considering local conditions. But, the position continued even after the Montagu-Chelmsford Reforms placed cooperation under the provinces in 1919. The RCS continued to hold sway after Independence. 
• Some States even provide for across-the-board takeover of cooperative boards. 
• There is a need to transfer work from the RCS to cooperative federations — as in Singapore.
• Get rid of Rural-Urban dichotomy

• The rural-urban dichotomy in the regulatory treatment of cooperatives is specious and outdated. 
• It perpetuates age-old divisions based on the nature of operations and population size. 
• Such differences are immaterial when regulation is to be based on the cooperative nature of organisations.
• Streamline Regulation

• The regulation and the supervision of cooperative banks should move to a new body from the RBI for urban banks and the National Bank for Agriculture and Rural Development (NABARD) for rural banks. 
• The arguments for combining supervisory powers with the RBI do not hold good for cooperative institutions. 
• Moreover, new regulatory body will ensure a fresh look at the regulation of these institutions to which stringent regulations like that of the Basel Committee are not designed to apply. 
• As for NABARD, the burden of inspecting rural cooperatives (and regional rural banks) is a distraction from its core mandate, apart from being a drain on resources.
• In India, adopting a multi-agency approach, especially after bank nationalisation, has affected the efficiency of both commercial and cooperative banks.