25 JUL, 2011, 10.45AM IST, M RAJSHEKHAR,ET BUREAU
We need to get into mission mode on promoting co-operatives in right spirit: Shashi Rajagopalan
With the growing recognition that much more needs to be done to encourage the emergence of self-reliant farmer organisations, reviving India’sco-operatives is back on the agenda. Shashi Rajagopalan, till recently on the board of the RBI, gained hands-on experience in promoting credit cooperatives and farmers’ agri-processing units during a two-decade stint working on the creation of co-operatives. In this interview, Rajagopalan illustrates why India needs co-operatives and discusses how they should be revived. The interview is also a fascinating look into a newly independent India’s early attempts to extending finance to all.
Dr KC Chakrabarty was talking about the need to revive co-ops as a way to pushfinancial inclusion. At that time, he said that while he knows how to push banks into rural areas, he is not so conversant on how to revive the coops…
First, we need to realise that some businesses are so badly off they need to be folded up. Does every cooperative have to be revived? No, if there are such gone cases, please let them go. Across the country, across 6 lakh villages, you have about 100,000 primary agricultural credit cooperatives (PACs), and you have Co-op Central Banks and you have State Co-op Banks.
Now, these PACs were started in 1904 to be pure thrift and credit co-ops. They were supposed to save regularly and lend to members from their own savings. Over a period of time, they became very strong financial institutions. Which is what happened the world over. In Europe, in North America, in Canada, in Germany, France, you have the most wonderful rural and urban credit unions. All based primarily on member savings and lending to members. These co-ops continue to flourish. In some areas, they have become like banks in more recent years. They were allowed to take the savings of the public at large. They participate in clearning house, their debit cards are accepted, and so on. So, even though, they are very much member-driven organisations, they have linked up with the larger financial system.
Given that in economically advanced countries, there is a need for such organisations, it is obvious that in India, there is even more reason why we need such institutions. After all, if you are talking about a place where everyone is literate, has access to banks, and yet chooses to have an institution of their own, there must be something to it.
And there must also be that play in the marketplace. All other businesses in the system are capital-controlled, capital-sensitive and capital-rewarding. All other businesses are formed on the basis that the person who puts in the capital is a risk-taker and must be rewarded. Here, you say, there is another way of conducting business where those who have common needs come together and fulfill those needs through a joint enterprise. In these businesses, while the members put in capital, capital must not be rewarded. It is a necessary part of the business but it is not the reason why the business succeeded. The business succeeded because the members came together and serviced yourself through that enterprise. Therefore, any returns from the business will go to each member in proportion with the business they did with that enterprise.
Plus, unlike the other form of business, where you have one share one vote, here you have one person one vote, saying that, be it a small farmer or a 20 acre farmer, the stakes are equal. So the concept of stake is understood differently. And co-ops are very clear that they are not the only form of business — they respect the fact that there are also capital owned businesses. But believe that unless user-owned businesses are also given the same space in the marketplace, capital owned businesses will be irresponsible. That is the basic theory. If the market is to behave, there must be enough user-owned institutions in the marketplace using different paradigms and therefore forcing the market to think differently.
Now, what has happened in India is that till the 1960s, there were these PACs. Even if there were just 20,000 or 30,000 of them, they were vibrant. They were only member-dependent, thrift-dependent. A Co-op Central bank was set up in Vishakapatnam district. Its leaders went village to village in an open cart saying, ‘Look, we want to set up aCooperative Central Bank, will you put in some money in as share capital?’ And there are stories of women coming out with their jewels, ten rupees, twenty rupees. People would come forward and give that and that is how many of these banks were set up across the country.
What was their scale? Village level? Tehsil level?
The co-ops were all village level. In the good old days, one village, one cooperative. And then, over time, they began to federate and become one co-op for 3/4 villages. And then, at district levels, banks began to be created saying let us federate…
Tell me about viability…
Co-ops will be viable because the members run them, through part-time services of members, through full-time services of members, and members get paid for the services they do. So, you only pay from what you earn. And you only pay local costs. There is no cost of capital (apart from servicing the capital through interest). The difference between a SHG and this is that a SHG is not a body corporate. If you are not a body corporate, you are liable jointly and individually.
When you are liable severally, you cannot own property, you cannot get into contracts, you cannot get into court cases against defaulters, etc, etc. In the case of bodies corporate, you can. I think this SHG movement has done a lot for rural women. I think she has become visible socially, politically, economically. However, I also think there is a conspiracy deliberately to say that for women, we will give groups, unregistered groups, so that, just as they cannot hold property individually, jointly also they cannot hold property, or enter into contracts, whereas the men can. And I am absolutely convinced that this is a subconscious conspiracy, which is probably not even understood by most people.
Back to the mid-60s, a committee came up saying these co-ops are a great idea and we should have government share capital participation in them. And that government should promote more and more such co-ops. And right across the country, state co-op laws were changed to say that, first, the government can become a member of a co-op by putting in some share capital. Now, the ownership was always at a state level or the district. It was almost never at the primary co-op level. However, controls were brought in for the entire structure. Second, it said that, henceforth, co-ops cannot appoint their own staff. They had to write to the registrar and the registrar would approve. Third, audit used to be a free service available to any co-op that wanted it.
Now it become a compulsory drill whereby they could not appoint their own auditors any more. Instead, the registrar would appoint an auditor from the goverbnment’s staff and the co-op would have to pay for him. So, a, I lost the right to appoint my own auditor. And b, I had pay for the audit. Also, it was no longer necessary for the auditor to finish the audit before the end of the year. Plus, the auditor did not report to the society. He reported to the registrar. As a result, all the audits began to go years behind schedule.
Then, elections used to be conducted by each co-op on whichever day they chose. Some had a three year term. Others had a two year term. Some had nine members on the board. Others had ten members on the board. Some had chairmen by a direct election on the board. Others chose the chairman through an indirect election. Each co-op had its own thing. Now, suddenly, you had the government saying it will conduct all elections for all co-ops, and all would have a three year term, and all would have 12 members on the board, etc, etc.
The reason why political parties bought into the report so well is that this was one way to scuttle local leadership. And also patronage. The primary thing here is that these are farmer votebanks and come from contiguous areas. Also, in the name of promoting co-ops, parties could have access to treasury funds of an institution that is outside the state’s control. Given that the conduct of elections, and the right to supersede a committee, was in the politicians’ hands, and given that the auditor was accountable to them and not the general body, they could play havoc with the funds.
Now, people who did not get their MLA tickets or defeated MLAs, all could all be accommodated in the co-ops. Similarly, if you wanted to misuse some of the funds of that co-operative, audit was in your hands. It was a great source of financing.
The impact on members? Mr Mahalingam of Shakti Sugars. He was a great co-operatives man and he walked out in disgust leaving all that he had built over decades to set up Shakti Sugars. Because he could not fight on a daily basis on this political front. Like him, across India, you had the most wonderful entrepreneurs who chose to use their skills for the larger community rather than for themselves. But we made things so difficult for them that they could not get on with the business of servicing members. There were enquiries against them all the time. There were inspections against them all the time. And they said, this is just too much. They walked out. And when they walked out, members began saying why am I saving so much money in this co-op for? I do not get to decide who is going to head it.
So from vibrant thrift and credit co-ops, they all became over a period of time, multipurpose channels of subsidised credit and members began to see themselves are beenficiaries of state largesse. And whatever came their way, they took it. And over a period of time, they withdrew their deposits from the coop.
What about elite capture? Did Co-operatives run the risk of the local elite running them as a fiefdom?
Well, these were local institutions. Even if there was mismanagement, the co-op would fold up, but the person running it would have to live in the same area. Many years later, when I worked for the revival of PACs, I discovered that no amount of member education and other things helped. What helped was increasing the percentage of members’ financial stake. Once their stake is significant, the members almost always chose the right person. Otherwise, they would choose the person who spoke the best, etc. Most of the presidents were fairly non-charismatic in terms of their ability to speak, to project themselves. But most of them were also strict disciplinarians. And they were not these charming flamboyant personalities at all. Whereas, in these times, where you have largely external funding coming in, you need brokers, you need people who know how to liaise. There is a huge difference between these two. Your question was on how to revive PACs.
We have to make them thrift-oriented where every member must save x rupees every month instead of waiting for banks to refinance or forNabard to step in. That may continue but that cannot be a longterm plan. The longterm plan has to be your own funding. When you have thrift in an organisation, not only do you have a stronger co-op, but wealth retention also takes place at the local level. The profits of that enterprise stay at the local level. Your own savings stay with you. They get invested locally. Plus the profits from the entire enterprise also stay locally — the profits of any third party leave the area.
And the fact that a large number of people have access to credit on a regular basis means there is purchasing power in the hands of a large number of people at the large, contiguous area year after year. You automatically have a large, domestic, service sector emerging which is sustainable because it is not falsely supported from outside. And almost everywhere we see, we see liquor, some entertainment, flour mill, tea shops, workshops, mason, and transport coming in first into the village. And wherever you have good co-ops, sooner or later, you see the housing going up in the area.
And that is a story by itself. It has not been reported anywhere so far. But, my goodness, look what we can do. Instead of going on crying that agriculture cannot support so many people.
The question is why people would put money into the PACs today? What about the comparative rates of returns? And how do they know their deposits are safe?
Yes. So the laws have to change. In the mid-80s, even with these bad laws, we did a campaign — i was the chief executive of a federation of 100 PACs from 17 districts in AP and we found that thrift is the way to do it. The first thing we had to do is ensure accounts are audited. Now, we could not get blessed auditors to have undated accounts because they wanted bribes. So what we did is we simultaneously got CAs to audit the accounts. Now, these were not accepted by the department and so, statutorily, we could not announce dividends but what we could do was offer interest on thrift.
So, the first time, we had annual reports prepared and presented to all the members. The accounts were fully read. There was time for the members to raise questions and so on. And then, the resolutions were proposed. We did all that. But every three years, we had to fight with the government to get our elections conducted. In 1984, 1987, we went to court. Apart from PACs, meanwhile, in AP, thrift coops began to come up. First unregistered, which were 100% member-financed. When the Taskforce on Farmer Indebtedness (its report was released last year) was going around, we saw their average age is about 10 years.
On savings of Rs 25-40 a month, the men’s thrift co-ops, had an average loan outstanding of Rs 5,000. The very fact is that the thrift and credit co-ops have shown that from day one they are profitable, that within 10-20 years, they are giving Rs 10,000-20,000 loans to tenant farmers and marginal farmers and oral lessees. Others won’t even be willing to lend to them.
It tells you that you can reach these levels in ten years. What are we waiting for? How much longer before we get into a mission mode on promoting co-ops in the right spirit?
So why the reluctance to revive them? Do state governments think Co-ops are an idea that failed?
No. Every state government knows co-ops are something that must be contained. There is no state govt which feels they failed. A prime case is that of AP where out of 13-14 district milk co-ops, nine moved into the new liberal co-operative law. And there was such opposition to their move! The government had employee unions go to court. But, once they shifted, within 2-3 years, profits doubled, members got better prices, and such umbrage the state government showed. The co-op minister and the animal husbandry minister brought in an ordinance saying dairy co-ops will not be under the new law. One of the complaints against the new law is that no one files returns. But the new law says, if they do not file returns, you can write to then and cancel their registration. If they are not functioning, cancel their registration. On the political side, there is a fear of new rivals emerging from the co-operatives.
You had told me earlier that the union government has drafted a Constitutional amendment for cooperatives confirming that they are part of governance and not businesses. And that, since cooperatives are in the State list, the only way to get states to enact good cooperative laws is to have a Constitutional amendment. This is something you oppose strenuously. Why?
This is an absurd idea. 14/15 years ago, I thought we needed a constitutional amendment. But, this amednment says that “The preparation of electoral rolls for and the conduct of elections shall vest in such an authority as may be provided by the legislature of the state, provided that the legislature might also lay down the procedures for the conduct of such elections.” Would you do that for companies? The audacity that, when it comes to farmers, that I will continue to control them through this process.