There’s a lot happening in finance: small finance banks (SFBs), payments banks, peer-to-peer lending platforms...
So, happenings in the world of cooperatives have been missed by many, although these could have significant implications on institutions operating on the principle of mutuality.
Cooperatives were one of the first instruments used by the state to achieve financial inclusion, much before the term was coined. Unfortunately, developments affecting financial cooperatives do not necessarily come from an understanding of the cooperative principles or the peculiarity of the organizational form. They come from a regulatory perspective.
First came a report of the High Powered Committee on Urban Co-operative Banks (UCBs), chaired by the deputy governor of Reserve Bank of India (RBI) R. Gandhi. The committee suggested that large UCBs be made SFBs or niche banks—that they move out of the cooperative fold—and UCB licences be granted to
well-functioning cooperative societies.
The entry norm for a SFB is a steep ₹ 100 crore in equity capital. The Gandhi committee suggested that there could be smaller UCBs (operating in a limited area) with a capital of ₹ 25 crore. And cooperative societies, which do not have any minimum capitalization requirements, could aspire to become UCBs. They would then grow into SFBs and later, universal banks. The Gandhi committee’s recommendations were in the same vein as that of the Malegam committee (2011), which examined the prospect of licensing of new UCBs.
The formulation by the Gandhi committee does not consider that in this process, the organizational form changes from being patronage-centric to capital-centric. It suggests that this can be addressed through a “few amendments to the co-operative societies’ act".
Meanwhile, the inter-ministerial group on deposit-taking has submitted a draft bill for banning unregulated deposits (called the Banning Bill). The bill put up on the finance ministry website for comments proposes two important things.
One: Only regulated deposits be permitted in all forms of institutions. The bill has proposed elaborate processes for anybody who violates this. The definition of regulated deposits includes deposits in cooperatives under various state legislations, but only to the extent that these deposits are placed by full-fledged voting members of the cooperative, thereby preventing the cooperative from seeking deposits from
non-members or nominal members. This is a welcome step, purely from the perspective of what the cooperative is all about: A business unit that caters to the needs of its members and not others.
Two: The bill seeks to bring an amendment to the Multi State Cooperative Societies Act—which comes under the purview of the central government—to prevent those cooperatives incorporated under the multi state Act from accepting any form of deposit, including from members. The reason: multistate cooperatives are being used as back-door instruments to garner large-scale public funds.
Somewhere in this discourse, the state and the central bank seem to have forgotten that a cooperative is not just another business entity similar to an investor-centric business. Cooperatives were formed to emphasize usership and the principle of mutuality, and diminish the primacy of capital.
Therefore, amending cooperative Acts to allow them to become banking corporations goes against the core values of cooperatives. It is true that many of the cooperative banks that are large are more banks than cooperatives and, therefore, it might be a practical solution to take the charade of the label of a “cooperative" from them. But this cannot be done by simultaneously opening the back door for more such institutions to come up.
In this regard, the Banning Bill is correct in its stand vis-à-vis cooperatives under the state law. Deposits can only be taken from “users" of the service who also have a say in the governance of the cooperative as members of the general body. But it violates the spirit of cooperatives when it prevents multistate cooperatives from accepting deposits.
While there could be merit in arguing that the principle of mutuality weakens when organizations grow, the bill’s logic comes from a regulatory perspective. In any case, the argument of size is to be made differently and if we were to stick to principles vis-à-vis size, then there should be no cooperative banks, which by definition deal with deposits of non-members and are large (though better regulated than cooperative societies).
While it is important to keep the depositor in mind and regulate the rogues, it is also important to understand that the regulation for cooperatives should exhibit an appreciation of how they are different from capital-centric organizations.
On the one hand, rural cooperatives have ended up being an extended arm of the state and now, on the other, we would be encouraging the private sector to have an entry into the banking sector through the cooperative back door. Unfortunately, at this time, the prism through which this issue is being examined is flawed.
M.S. Sriram is a visiting faculty at Centre for Public Policy, Indian Institute of Management Bangalore.