NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT
National Seminar on Productivity in Indian Agriculture(September 2 & 3, 2011)
Vaikunthbhai Mehta Memorial Lecture
Issues Relating to Cooperatives in India –
Dr. Prakash Bakshi, Chairman NABARD
26th September 2011
Dr Chandra Paul Singh, President of NCUI, Dr Dinesh CEO, other dignitaries, Ladies
I feel honoured to be here with you all and deliver this year’s Vaikunthbhai Mehta
Memorial Lecture. I also feel extremely humble, when I see the names of the
stalwarts like Shri B. Venkatapaiah, Prof V.M. Dandekar, Prof A.M.Khusro and Shri
Pranab Kumar Mukherji in the list of those who have earlier delivered this memorial
lecture. As a student of economics, I have always believed in the inherent strength of the cooperative form of business organization in the Indian context. My association with the Vaidyanathan Committee first and subsequently, the implementation of the reform package for cooperatives, has given me a unique opportunity to study cooperatives closely. Therefore, today when we talk about the imperatives of human resource development in the cooperative sector, I marvel at the vision and the foresight of Shri Vaikunthbhai Mehta, his profound thinking and prolific writing. He had the distinction of serving the Maharashtra State Co-operative Bank as Chief Executive for an uninterrupted period of about 35 years. He was also the Minister of Finance and Co-operation of the then Bombay State and was first Chairman of Khadi and Village Industries Commission. However, he is, especially remembered for his contribution to the cause of Cooperative Education and Training and HRD. How true it was when he said "Co-operative training is not merely a pre-requisite but a permanent condition of co-operative activities". As a befitting tribute to him and his memory, a National Institute has been named after him, as Vaikunth Mehta National Institute of Co-operative Management (VAMNICOM) and through this institution, he continues to inspire all of us associated with the cooperatives. I am indeed happy and feel privileged to deliver this 16th memorial lecture today. I pay my respects to his memory and begin my lecture.
Cooperatives as a form of business organization is still attractive
2. There are numerous propositions/theories propounded by scholars to explain
the emergence and survival of cooperative as a 'firm'. The essence of all these
propositions is that cooperation emerges, when it either reduces the cost and/or
increases the benefits to its members from undertaking an activity of common
3. In India, cooperatives are the oldest form of financial intermediation in rural
areas, but its contribution is evident in other areas too. The Indian cooperative
movement is the largest in the world, representing 24 crore members and over 6
lakh cooperatives from village to national level and is functioning through important
sectors like credit & banking, fertiliser, sugar, dairy, marketing, consumer goods,
handloom, handicraft, fisheries, tribal development, labour, housing, etc..The
cooperative movement originated against rural poverty, aggravated by chronic
indebtedness of farmers due to usurious practices of money lenders. This coupled
with the agrarian disturbances led to the concept of cooperative approach through
credit societies in the year 1901. The cooperatives emerged as an association of
persons, united voluntarily to meet with their common economic needs and
aspirations through jointly owned democratically controlled enterprises based on
moral principles of self help, self responsibility, equality and solidarity.
4. The movement grew in numbers diversified in different forms and contribution
to rural sector. Take the dairy co-operatives for instance, with 45541 societies and
nearly 6 million members , majority women, have been the channels for the success
of Operation Flood in the country and have enabled millions of poor farmers to come
out of the poverty trap. Similarly, in the textile industry, the cooperative spinning mills
numbering about 231 with a membership of nearly 6 lakh and the Weavers'
Cooperative Societies (1513) with a membership of 1.4 million have helped prevent
exploitation of the weavers by the private traders.
5. But, barring a few notable successes, like the dairy cooperatives or sugar
cooperatives, handloom cooperatives or the fertiliser cooperatives, many of the
cooperatives, including credit cooperatives, are facing rough weather. The story of
credit cooperatives – the rise and decline – is well known this audience.
6. This however does not imply that the relevance of cooperatives is on the
decline. In fact, cooperatives as a form of business organization has been attracting
an increasing attention both at the policy and operations level. Aggregations models
like producer companies, producers organizations, farmers organizations which are
essentially cooperative in character, but with driven by market orientation, are being
tried out. Some of them with success! This implies that the cooperative form of
business still has a place in the globalized world. Though presently, most
cooperatives, with membership of subsistence level farmers, may not be able to
address the issues of aggregation, value addition and vertical integration from local
to national level markets, but the potential is recognized and the need to develop
cooperatives and graduate them to address commodity value chain frameworks is
7. The intellectual appeal for the cooperatives thus, is universal and for all times
to come. No wonder then, the United Nations General Assembly has declared 2012
as the International Year of Cooperatives. This is in recognition of the contribution of
cooperatives to socio-economic development, in particular recognizing their impact
on poverty reduction, employment generation and social integration. As United
Nations Secretary General Ban Ki-moon put it, "Cooperatives are a reminder to the
international community that it is possible to pursue both economic viability and
8. It is on this background, I propose to discuss, the emerging challenges,
concerns, and raise some issues about cooperatives – essentially about the credit
cooperatives and ponder over the role of cooperatives in today’s circumstances.
9. The overarching focus of the development policy on inclusive growth, the
urgency to address the issues of the “excluded” and the changes that are taking
place in the rural landscape indicate the scope for cooperatives to play an important
role in the rural economy. Increasing monetization of the rural economy, service
sector penetration in rural India, its impact on the pattern of employment and
incomes generation, as also on the aspirations of the rural population - especially the
younger generation - are some of the other striking changes. On the other hand,
stagnancy in agricultural growth and the changes in the agrarian structure that are
evident also are critical. Consider the data on operational holdings. Over time, both
the number of small & marginal farmers and the area cultivated by them has
increased significantly. Their number has gone up from 6.61 crore in 1980-81 to
10.76 crore in 2005-06 (if the number of operational holdings are taken as a proxy
for the number of small and marginal farmers) and the area cultivated by them
increased from 26% in 1980-81 to around 41% in 2005-2006. How to address the
constraining small-scale farming, and evolve suitable forms of aggregation, together
with broader livelihood occupations and then integrate with adequate and affordable
credit flows is the main challenge today. In principle, I believe, that the cooperatives
can address these issues. Their presence and outreach, matched with market
orientation could bring in a qualitatively different cooperative movement
10. Let us look at some of the other important changes that are taking place in the
rural financial landscape within which the credit cooperatives work. Developments
like the UID project of the GoI which, by providing biometric identity will not only
make the opening of the accounts much simpler, but provide an impetus to financial
inclusion agenda. The emergence of post offices and their presence in the last mile,
the mandating of payments (e.g. wages under NREGA, pension payments) through
formal channels provides an important push to financial inclusion. Similarly, the Core
Banking Platform will provide seamless connectivity and the telecom infrastructure
will play a significant role in reducing pressure at the 'bank counter' and
fundamentally redesigning the architecture for access to financial services. The
Business Correspondent model will which is being increasingly fine turned in the line
with demand side inputs will play a significant role in future together with the
mandating encouragement now being given to mobile companies to be part of the
financial inclusion agenda.
Where does cooperative banking stand among all these developments? What
are its other concerns?
11. Cooperatives seem to be fading away from the agriculture credit scene as
reflected by their declining share in the institutional credit. Even after the entry of
commercial banks and RRBs in the 1970’s, cooperatives continued to provide
significantly larger portion of agricultural credit for nearly two decades. Until early
1990’s, cooperatives provided almost 62% of the agri-credit in the country, with
commercial banks providing a little more than 30%, and the RRBs meeting a meagre
7%. Over the years the cooperatives share is on the decline. During the Xth Five
Year Plan, agricultural credit flow from all institutional agencies was Rs. 6,47,101
crore, the share of cooperative banks, being 25.3 per cent (Rs. 1,63,626). There had
been regional variations too in the share of cooperative banks and the shares ranged
from 3.49 per cent in the NE region to 33.98 per cent in the western region.
12. During the first three years of 2007-08, 2008-09 and 2009-10 of the 11th Five
Year Plan, however, while the agricultural credit flow from all institutional sources
rose to Rs. 9,39,161 crore, the share of cooperative banks had declined to Rs.
1,44,187 crore to around 16 per cent. This decline took place notwithstanding the
fact that the annual average credit flow to the sector increased from Rs. 32,725 crore
during the 10th Plan to Rs. 50,030 crore during XI Plan. The declining share of
cooperatives is worrisome because as an institutional sub-set during 2009-10 they
supported the largest number and proportion of small and marginal farmer accounts.
While the STCCS registered a positive growth in credit, the LTCCS registered
negative growth during both the Plan periods. This is an area of concern as it can
jeopardize capital formation in the farm sector. These developments do not augur
well not only for the cooperatives themselves, but also for the small and marginal
farmers and the overall agricultural growth itself.
Can the cooperatives withstand competition?
13. The cooperatives especially the short term structure, and its vast network
with ... outlets is one of the strengths of the system. It would be difficult for any other
type of institution to establish similar type of set up for credit and mobilisation of
resources. Besides the changes outlined in para 10, changes are also evident in
terms of new players, new products and practices, greater IT integration, for
enhancing customer services and convergence of financial services at the delivery
point. The focus is intense on managing quality portfolios, pricing of products,
reduction of NPAs and muliti skilling of staff. The commercial banking segment has
also undergone changes in its ownership pattern, corporate governance practices,
disclosure patterns and adopting strategic business planning. This the business
environment. Whether the cooperative banking system is able to leverage on its
strengths, especially the large network and the ability to serve even the very small
accounts is an issue. The field level feedback indicates that the assumption that
clients of cooperative banks are captive may not be true and also that they will not
mind deficiencies in client servicing also may not be true. More importantly, how do
the cooperatives stand in terms of price completion is another critical factor which
will decide the market share of cooperatives.
What are the issues in increasing credit flow through cooperatives?
Poor resource base of PACS
14. The poor resource base of Primary Agricultural Credit Societies (PACS), their
continued poor management and governance, and lack of effective member
participation continued to be significant barriers to increasing credit flow through the
CCS. Thus, PACS have an average membership of about 1,400 and owned funds
of Rs. 13 lakh per society. Baring around 22,000 PACS in the four southern states
and West Bengal (where average PACS level deposits are around Rs.90 lakh), the
average deposits in the remaining 74,000 PACS in the country around Rs.9 lakh per
society or less than Rs. 650 per member. This position could have been remedied
had the upper tiers (DCCBs & SCBs) been in a position to supplement the resources
of the ground level institutions by tapping deposits non-agricultural areas and clients.
Unfortunately, over a period, they also seem to have lost their way as evidenced by
the fact that though, e.g., the deposits of CCBs are close to Rs. 1.25 lakh crore, and
their Credit Deposit (CD) ratio is also high at 72%, the ratio of their agricultural credit
to deposits i.e. (the agriculture-credit deposit ratio) is less than 35%. In other words,
even CCBs are shying away from supporting agricultural credit, which was raison de
tere for their being set up. The story of SCBs is also similar. In the circumstances,
the Short Term CCS continues to survive primarily on account of refinance support
from apex institutions like NABARD. The downside of the limited loanable resources
of PACS has been to the determent of members as they have been driven to operate
within credit rationing frameworks.
Low level of member participation
15. Low level of member participation at the PACS level has been another cause
of concern. Notwithstanding the initiatives taken in the wake of the Vaidyanathan
Committee Report this continues to dog the structure. A critical issue for the future
is, therefore, how to increase member participation in PACS and ensure that they
have a financial stake in these organisations.
Revival package - What remains to be done?
16. It may be seen that a lot has been achieved in terms of capacity building and
by way of legal reforms. However the reform process is still far from complete. In
several states, professionalization of the Board of Directors has not happened to the
desired extent and CEOs of CCBs/SCBs are yet to be appointed as per Fit & Proper
Criteria prescribed by the RBI as undertaken by the CCS, in terms of the MoU under
the Revival Package. Elections are yet to be held in states like Andhra Pradesh,
Arunachal Pradesh, Manipur, Nagaland and Tamil Nadu. Common Accounting
System is yet to be grounded in almost 11 states as on date although training in this
regard has been extensively imparted in all the states concerned with some states
also availing of Refresher Programmes in this regard. Computerization of PACS is
another area which needs to be hastened. State Govts have also yet to fulfill their
commitment towards various key parameters as committed by them under the
Package viz., release of their committed liabilities towards the CCS, preparing a
roadmap for ineligible PACS, withdrawing State Govt nominees from the Board of
Directors of the CCS, reducing their stake in the CCS to <25% of the total share
capital, as prescribed under the Package and arrange for conduct of timely elections.
17. A major cause for concern is the issue of re-amendment of the Acts after the
release of recapitalisation assistance and other interventions under the Revival
Package in states like Madhya Pradesh and Andhra Pradesh, resulting in
undermining the autonomy of the CCS and amount to violation of the covenants of
the MoU entered into by the State Govts concerned. This is a very undesirable
development and needs to be rectified forthwith in the long term interest and well
being of the CCS.
What has been the impact of the Revival Package?
18. The true test of the sustainability of the reforms process would be the ability of
the CCS to function as vibrant, autonomous, financially strong institutions which are
able to fulfil their avowed objective of purveying credit to their members not only for
agriculture, but also to re-invent themselves as a one stop shop for meeting all
financial/business requirements of their rural clientele viz, credit , insurance, retailing
of agri products like fertilisers/pesticides and any other service that a farmer may
require. Impact studies conducted in a few states by external agencies reveal that :
19. Positive features
· Financial assistance under Package has helped cleanse the balance sheets &
improve the share capital both at PACS and CCB levels.
· Major portion of recap assistance has gone towards CRAR/business activities
and strengthening the CCS.
· Financial variables viz loaning , deposit mobilisation, reserves, share capital,
coverage of SF/MF have shown improvements over time after receipt of funds
under the Revival Package.
· Definite improvement observed in PACS that received early recap assistance.
· PACS are making conscious efforts to improve/diversify business & profits
through both credit & non credit businesses.
20. Areas of Concern
· Recap assistance has not been released to all PACS so far.
· Depositors have not been given full voting rights as byelaws are yet to be
· Dual control of PACS by Department and CCBs continues as Rules and Bye
laws are yet to be amended in several states.
· Autonomy in matters of governance and management at PACS not effective
as yet and this in turn is adversely affecting decision making abilities of
· Slow progress in grounding of CAS/MIS on account of acute shortage of staff
at PACS level is a major cause for concern.
· There is a need for continuous efforts for capacity building even after the
period of implementation is over.
Action for the Future Improving Share Capital and Deposit Safety
21. The critical issue for the future is therefore increasing member participation in the
affairs of PACS and ensuring that members have a substantial financial stake in the
cooperative. As PACS were often formed as state led initiatives in the name of the
“poor farmer”, the face value of membership fee or a share in a PACS has often
remained at a paltry Rs. 10, or at best Rs. 100 per member, and more often than
not, even this was provided by the state under “universal membership” campaigns. It
is clear that in today’s world, such a low share-price has no value as far as capital of
even a small financial institution like a PACS is concerned. True that the share
capital of a member is linked to the quantum of loan, thereby, notionally increasing
the capital base of the cooperative but the fact remains that unless dividend is paid
on such share capital, the cost of credit from a cooperative becomes much higher
than that from competing banks, i.e., RRBs and Commercial Banks. Unfortunately,
even profit making PACS were often denied permission for paying dividend. In any
case, half the PACS were making losses. It is therefore necessary to increase per
member share capital to at least Rs. 500 which, technically, is not even two or three
day’s wages of a single member of a rural family.
22. Members today are hesitant to keep deposits even with their own PACS as they
are rightfully concerned about the safety of their deposits. Since such deposits would
not be covered by DICGC, and the deposit insurance schemes of states have
remained only on paper, NABARD has formulated an “Institutional Protection and
Deposit Safety Scheme (IPDSS) for PACS on the lines of similar schemes operating
in Germany and Hungary. Sustained campaign, incentivising a habit of making
regular thrift among farmers, a la SHGs, is therefore necessary as part of the
financial literacy and counselling initiatives. Immediate launching of IPDSS would
give a boost to this initiative.
Increasing Member Participation
23. Farmers have become used to treating themselves as mere “clients” of PACS
from where they avail credit with their responsibility limited to voting in the occasional
elections in the PACS. Even these votes are often cast on party affiliations with little
reference to functioning of the PACS or the capability of the Committee Members.
This needs to change immediately. Campaigns to make members aware of their
rights and responsibilities, and formation of village committees of members to
monitor and activate members in the regular functioning of PACS would have to be
immediately planned and executed.
24. With the increasing number of small and marginal farmers and oral tenancy,
formation of JLGs within these village committees then becomes the next necessary
step. NABARD has already initiated such a move that needs to be converted into a
25. The central theme for increasing member participation in the affairs of the PACS
is take steps which increase the number of contacts between the member and the
PACS. It is easy to surmise that the most effective contact can only be through
fruitful business between the two, and the product range offered by the PACS
therefore needs to widen significantly.
Improving product Range of PACS.
26. PACS today primarily offer crop loans and have been legally enabled to provide
loans for farm investment and other activities. Some PACS also stock fertilisers.
Most members, however, have to look to other agencies not necessarily located in
their village to even get other products and services required for their farming
operations. This increases the farmer’s transaction costs.
27. It would be necessary to convert PACS into one stop shop for farmers – the
member farmer must first think of his PACS whatever he needs for his farming
operations and also otherwise, and the PACS needs to be enabled to either itself
provide that product or service or arrange for that expeditiously. Examples of PACS
engaged in procurement, providing warehousing facilities, stocking and providing
other inputs including seeds and saplings, leasing out farm equipments, becoming eenabled
common service centres providing land records and information on weather,
market prices, and extension advisories, and so on are now available in some states.
PACS also need to provide other financial products, especially insurance, and
enhance their fee based income. A planned initiative to develop at least 5 such multipurpose
PACS in each district within one year could be the first step of a national
drive. These will have demonstration and demand effect and help other PACS in the
district to develop similarly. Substantive and well planned HR initiatives will be part of
any such drive including providing managerial support and manpower wherever
Legal and Regulatory Enablement
28. As mentioned earlier, Coop Societies Acts (CSA) have been amended in 21
states implementing Vaidyanathan recommendations. These amendments aimed at
providing flexibility to the CCS entities to make them more efficient. For example,
any CCS entity can now take loans from any financial institution regulated by RBI.
Technically, this enables a PACS or CCB to take loans from any other cooperative
bank, commercial bank or an RRB or even refinance directly or indirectly from
NABARD. However, consequential amendments in NABARD Act to provide
refinance to any PACS directly or through a commercial bank or RRB are yet to be
made which practically nullifies the enablement created through the CSA
amendments. Likewise, amendments are yet to be made to enable cooperatives
registered under the parallel cooperative societies Acts or the multi state cooperative
societies Act (MSCSA) to be recognised as banks. Consequential amendments
would also be required in the DICGC Act, BR Act, and RBI Act. Without such
amendments, the intended reforms of the Vaidyanathan package will go only half the
way and leave sufficient scope with the states to continue interfering in the affairs of
Role of cooperatives in financial inclusion
29. The recent experience shows that the increased credit flow in the system was
achieved - to a large extent - through the process of credit deepening and small
farmer coverage has not been increasing. With about 8 crore farmers remaining
outside the fold of institutional credit such stiff increase can be achieved with a thrust
on credit widening. If small and marginal farmers have to participate in the growth
process effectively, collectives, cooperatives, corporatization & contracts need to be
promoted which could be the vehicles of aggregation. JLGs promoted by NABARD
could serve as the intermediate stage interventions. The WG is deliberating on these
issues and hopefully a strategy would emerge.
SHGs is the best method to achieve financial inclusion
30. In the post Vaidyanathan period, the cooperatives have become relatively
stronger and can play an important role in promotion of SHGs and their linkage with
them. At the all India level, cooperatives have promoted and savings linked about
11.9 lakh SHGs, but only 45 per cent of them are credit inked. This shows the need
for cooperatives to ensure credit linkage of existing groups which have been
promoted and saving linked with them. Some cooperative banks – most notably
Bidar in Karnataka or Vilupuram in Tamil Nadu have done exceedingly well, primarily
because they looked at SHGs as a business opportunity.
Latest Initiatives taken by NABARD for Rural Cooperative structure
31. In keeping with its role as the apex institution committed to agriculture and
rural development, NABARD has always been at the forefront in facilitating a healthy
rural credit delivery system through refinance, policy advocacy and technology
support. Some of the intiatives taken by NABARD in recent times to enable the
cooperatives to purvey credit in a more effective manner, apart from overseeing the
implementation of the Revival Package for STCCS, are worth mentioning:
(a) PACS which are the primary unit of the Cooperative Credit Structure at the
grassroots level. PACS were in the past quite often deprived of finance from higher
financing agencies due the inherent financial weaknesses of the CCBs. Hence, with
a view to leveraging the deep penetration of PACS and with a view to increase the
flow of credit for Agricultural Operations to farmers, NABARD has with effect from
the year 2011-12, decided to make available a new product of lending to PACS
through RRBs and Commercial Banks.
(b) Refinance for ST loans to SCARDBs in addition to the LT loans, Switch over to
loan system as against the system of floatation of debentures which is more
cumbersome, sponsored schemes for construction of cold storages and onion
godowns /rural go downs, ACABCs etc
PACS as Multi -service Society
32. PACS are generally taking care of the credit requirements of its members. To
increase the business portfolio of PACS so as to make it a self sustainable entity, it
is essential that the PACS should provide additional services like agriculture
implements on hiring basis, collective purchase of inputs, having good quality
storage capacity as per Negotiable Warehouse Receipt System, etc. The
requirements can be worked out as per the local demands of the farmers. This will
help the farmers in increasing the productivity which in turn the increase the loan
portfolio of PACS, besides getting additional income from these facilities. Presently
PACS are carrying out these activities either through the Central or State Assisted
Programmes or by involving their own surplus funds. However they are not able to
scale up the activities due to limited funds. Hence, there is a need to converge the
various schemes and also to identify the areas which can be supported by NABARD
from its existing funds to make PACS a sustainable model to meet all the needs of
the farmers. In the process, all the stake holders working for the betterment of PACS
have to join together to come out with a strategy to identify various areas of
development and the sources for meeting out the funds. In the process, the role of
PACS and the areas in which they should strengthen themselves may be identified
33. The superiority of the cooperative as an organisational form and the issue of
whether the model by itself is sustainable, if put to debate, shall invite a plethora of
views which are quite contrasting. In the Indian context, the question is, whether
cooperatives ought to transform their internal performance as a first step and then
focus on directing their energies to improving the business environment in which
34. In the Indian context, the issues concerning cooperatives center around their
operational efficiency. The politicisation and bureaucratisation of cooperatives in the
initial years of the cooperative movement, was viewed as an instrument of state
control intended to promote public access to credit. But it inevitably led to increasing
issues of financial mismanagement and operational inefficiency, in the form of
political interference in appointments to the boards, loan sanctions, delayed efforts at
loan recoveries, announcement of waivers, legal and regulatory issues, poor bookkeeping
and maintenance of records, weak internal controls and a multitude of other
issues. Whether there is a case for reviving cooperative institutions and revitalising
them has been debated at length across the length and breadth of the country. The
case for revitalising cooperatives stems from the need to introduce administrative
and regulatory changes and measures aimed at financial restructuring in order to
make them member-centric, autonomous, independent and self –reliant institutions
in terms of decision making and conducting business operations.
35. What is needed is a change in attitude, in the sense that in a highly
competitive business environment where commercial banks and mFIs are evolving
innovative strategies to reach out to the rural areas, cooperative institutions, owing
their origin to rural areas can utilise it as an inherent strength to promote the reach of
its activities. The viability of the three- tier cooperative structure and whether this
system has to undergo an overhaul to reduce the level of transaction costs in order
to make the availability of funds to the members a hassle free process is also an
issue that ought to be discussed on an urgent basis.
36. Recapitalisation of cooperatives cannot solve all the problems that it has been
facing- instead cooperatives should learn to capitalise on their inherent strengths.
Administrative and legal regulatory issues, if cleared can ensure a better operating
environment for cooperatives, which eventually, shall lead to a better outreach of
institutional credit in rural areas and thereby increased rural prosperity.