The government is close to sealing a deal for a $1.8 billion (Rs7,380 crore) loan package from three multilateral institutions to revive cooperative banks, in an effort to revive the agricultural sector.
Cooperative banks lend money to more farmers and small entrepreneurs, especially in rural areas, than other banks, but they have accumulated significant losses over time largely because of poor governance and interference by local governments.
“We finished negotiating a $600 million loan from the World Bank and will shortly negotiate $200 million loan from KfW,” said an official at the finance ministry who did not wish to be identified. The two loans will supplement a $1 billion one approved by the Asian Development Bank’s board last December, the institution’s largest ever advance to a developing country.
The multilateral loan package will be used to boost the capital base of cooperative ba-nks, thereby enabling them to write off accumulated losses.
The revival package for cooperative banks is already underway, said the official, and the Central government has given a grant to institutions in Haryana. State governments, which control cooperative credit societies, are required to sign an agreement with the Central government promising to reform the cooperative credit structure as a pre-requisite for such grants.
Eleven states have signed such agreements and promised to extend more autonomy to the cooperatives and professionalize their management.
Cooperative credit structures operate through a three-tier system: primary agricultural cooperative societies at the bottom of the rung; district central cooperative banks at the next level; and state cooperative banks.
Under their agreement with the Central government, the equity holding of state governments will be capped at 25% in the three tiers of cooperatives and their presence on the boards of cooperative banks will be limited to one nominee. The states have also been asked to amend the rules under which credit societies operate to ensure that the Reserve Bank of India’s regulatory powers are not diluted with respect to cooperative banks.
The reforms required to revive the sector were spelt out by the Task Force on Revival of Cooperative Credit Institutions under the chairmanship of economist A. Vaidyanathan; the task force submitted its report in December 2004.
The report estimated that an investment of about Rs13,596 crore would be needed to bolster the capital base of cooperative credit institutions in India. According to the report, the cooperative banks had accumulated losses of a little over Rs9,000 crore at the end of 2002-03. It listed the lack of autonomy and bad governance as the main reasons for this. Over the last few years several cooperative banks have closed down. In an effort to protect depositors, the government instituted an insurance scheme that would make payments to them in case a bank closed down.
The report said that cooperative banks played an important role in distributing credit in rural areas. Cooperative banks have twice the number of rural outlets and 50% more clients than commercial banks and regional rural banks put together, it said.
The report pointed out that while commercial banks had gone on to become the largest lenders of rural loans, the average size of these had increased 500% when compared with those disbursed by cooperative banks.
Recapitalizing cooperative banks is not the best way to boost agricultural credit, said Ashok Gulati, director, International Food Policy Research Institute.
“Overall, 40% of agricultural credit still comes from the informal sector. I have more hope in micro-finance institutions and non-banking financial intermediaries (including moneylenders) than in reviving cooperative systems,” he said.
The task force listed 30 state cooperative banks, 367 district central cooperative banks, and 112,309 primary agricultural credit societies (PACS), the bottom-tier of the cooperative system (the PACS have a membership of 120 million people).
The Centre’s revival package, meant to be a one-time measure, will cover the accumulated losses of cooperatives with the aim of improving their financial health.