Cooperative Credit in Rural India
Introduction
Credit is an
important input in the development process. Ensuring the provision of timely
and sufficient credit to as large a segment of rural population as possible has
been one of the major policy initiatives which has guided the formulation of
public policy in the country. The rural credit system in India has evolved through different
phases as a result of these initiatives
and there has been a substantial broadening of the infrastructure for credit
delivery resulting in increased outreach and reduction in the influence of
informal agencies. Rural credit in India is purveyed through a
multi-agency system comprising cooperatives, commercial banks and regional
rural banks. The major policy in the sphere of rural credit has been its
progressive institutionalization so as to ensure timely and increased flow of
credit to the farm sector, reduce regional imbalances and to provide increased
credit support to the special programmes.
Financial
markets contain a formal and an informal sector. The formal sector is
institutional and officially monitored and regulated. It comprises the
commercial banks, RRBs, LABs, and cooperatives. This sector is characterized by
large scale operations and offers a wide range of financial products and
services over a large geographical expanse which in the case of the
nationalized banks can exceed regional and national boundaries. The strength of
this sector lies in that it is protected by legislation, controlled by the
central bank and supported by the state and the national and international
banking community. The informal sector is difficult to categorize due to its heterogeneity. The term covers
the activities of large number of intermediaries such as the indigenous
bankers, professional and non-professional moneylenders, traders, merchants
etc. The growth of financial
intermediation through the expansion of banking services has been a powerful
catalytic agent for development. Though a good
progress has been made in provision of credit through institutional agencies in the rural sector,
the banks are facing difficulties due to
declining recoveries and mounting overdue.
Policy
measures taken by the RBI following the nationalization of the commercial banks
in 1969 aimed at increasing the spread of banking network in the rural areas.
The primary emphasis during that juncture
was on making banking facilities available in a large number of unbanked
centres in rural and semi-urban areas both from the point of view of resource mobilization
and extension of credit facilities. The cooperatives were not able to meet the
need for credit which had increased considerably with the Green Revolution and
the boost which it had provided to agricultural production and productivity.
The nationalization of banks enabled them to supplement the efforts of the
cooperatives. The commercial banks entry into the field of rural credit was
accompanied by major policy initiatives aimed at (i) expanding their branch
network and (ii) earmarking a portion of bank credit for priority sector.
Public sector banks also opened specialized branches to extend credit to agriculture and other forms of
credit in rural areas.
Cooperative Credit in Rural India
Indian planners
considered cooperation as an instrument of economic development of the
disadvantaged sections, particularly in the rural areas. In independent India , the
cooperatives took up and successfully shouldered the responsibility as
institutions to purvey credit for agricultural and rural development. Thus,
they became business enterprises with social mission. To enhance the supply of
institutional credit to small and marginal farmers and the needy at a low rate
of interest and to eliminate moneylenders and other non institutional financial
intermediaries from the rural credit scene, the cooperative movement was
launched vigorously after independence and the provision of cooperative credit
was organized on increasingly larger scales in successive plans.
Among
cooperatives, rural credit cooperatives play a pivotal role in the rural credit
delivery system, whereas the urban cooperative banks aim at mobilizing savings
from the middle and low- income groups and purvey credit to the weaker
sections. Many rural areas would not have had the access to institutional
credit if rural credit cooperatives/ banks had not been in existence and if the
delivery of credit to the rural people had been left to commercial banks only. The
cooperative system now enjoys a tremendous outreach. As on March 2000, short
term cooperative credit structure had more than 92000 primary agricultural
credit societies (PACS) at the village level, 367 district central cooperative
banks (DCCBs) at the district level and 29 state cooperative banks (SCBs) at
state level meeting all types of credit needs of the rural sector. However by
2005 there were 61,076 public and private banks including RRBs, 1,12,309 cooperative credit societies at
village level and 1,573 SCARDBs / PCARDBs in the service of rural poor to meet
their credit needs. Thus, in all
1,74,958 rural outlets existed by March 2005, engaged in providing credit to
rural needy and thereby improving immensely access to the rural credit.
The
cooperative credit structure in India
has two main wings – the long term credit structure and the short term credit
structure. Long term credit is provided generally by a two-tier structure
comprising the state cooperative agricultural and rural development banks
(SCARDBs), and the primary cooperative agricultural and rural development
banks(PCARDBS). The main source of funds of these institutions are debentures
floated by them which are subscribed by
NABARD. Short term credit, on the other hand, is provided by a three-tier
structure of state cooperative banks (SCBs), district central cooperative banks
(DCCBs) and primary agricultural credit societies (PACS). While the PACS
operating at the grassroots level are by and large conduits for flow of funds
from the higher level financing agency to the borrower and vice versa, with
little resources of their own, the institutions at the two higher tiers
mobilize resources, inter alia, by way of deposits from the general public.
Even so, the bulk of short term credit requirements of the cooperative
structure are derived from funds provided at low rates by the Reserve Bank
through NABARD.
Policy initiatives by Government
Our economy is predominantly an agricultural
economy. Keeping in view the crucial importance of agriculture and in the
context of the strategy adopted for increasing foodgrains production so as to
ensure food security and the need for greater involvement of banks in
supporting this effort, banks were asked to step up the direct finance extended
to agriculture. Rural development in the country over the years made stupendous
strides, thanks to a durable institutional arrangement in the form of credit
delivery system for the rural people in general and the farmers in particular.
In the crucial credit delivery for promoting and sustaining agriculture and
rural development, the apex body that stands in the vanguard is indubitably
NABARD. It was established for greater focus on agriculture and rural
development. This way, NABARD works through the regional rural banks(RRBs),
cooperative banks and also through the state governments for rural
infrastructure.
The concept of
priority sector lending was developed to ensure that credit was channeled to
various sectors of the economy in accordance with the national planning
priorities. At present the priority sector comprises agriculture, small scale
industry, retail traders, small
business, professional and self-employed persons, self-help groups (SHGs),
housing, consumption loans for weaker sections, government sponsored poverty
alleviation and employment generation programmes etc. As an innovative measure
of credit delivery, all the banks are implementing the Kisan Credit Card Scheme
for the farmers to enable them to readily purchase agricultural inputs such as
seeds, fertilizers, pesticides etc. and
draw cash for their production needs. Kisan Credit Card(KCC) is a revolving
cash credit facility which aims at providing adequate and timely credit to the
farmer.
Banks
have also been extending finance to small scale industries (SSIs) including the
tiny sector of rural artisans/ cottage and village industries. The Lead Bank Scheme was devised as an area
approach with the district as a unit for planning and dispensation of credit.
The aim is to achieve the overall development of the district with the
participation of banks. Since independence, the RBI has taken a number of
measures to augment the flow of rural credit. It has a unique system of
extending General Line of Credit-I for seasonal agricultural operations and
General Line of Credit-II for the handloom sector out of the created money. The
RBI has also been issuing directives for a long time now regarding ‘social and
development banking’ imposing a cap on
the interest of credit and expansion of rural branches. The RBI has also made
it mandatory for commercial banks to lend 40 percent of their advances to the
‘priority sector’. RBI introduced a
scheme of service area approach for commercial banks in 1989, which imparted
development orientation to development banking. With this, the planning process
was further decentralized. Each rural / semi-urban bank branch was allotted a
specific area comprising 15-25 villages which is its allocated ‘service area’
in which it can concentrate on focused lending and contribute to the
accelerated development of the area.
The
main concern of the government and the Reserve Bank relates to the provision of
credit to the rural poor so that they will be able to come out of the
stranglehold of poverty through available employment opportunities leading to
increased and sustained incomes. The poor need assistance in small doses, at
different times suitable to them for a variety of purposes and the formal
credit delivery system is not adequately equipped for the purpose. This has led to promotion of
informal groups of the rural poor called the self help groups (SHGs) for
pooling their small savings with a view to help themselves in financing their
emergent needs. In view of the effectiveness of routing financial assistance to
the poor through the self help groups, the Government of India has accorded priority to coverage of SHGs by
banks with help from NABARD and the Small Industries Development Bank of India
(SIDBI).
The Integrated Rural Development Programme
(IRDP) was the major poverty alleviation programme for families below poverty
line in the rural areas of the country. However, with effect from April, 1999,
IRDP and its allied schemes have been restructured into a single programme
known as Swarnjayanti Gram Swarojgar
Yojana (SGSY) which is a holistic
programme covering all aspects of self-employment such as organization
of the poor into self help groups, training, credit, technology, infrastructure
and marketing. The Prime Minister’s Rojgar Yojana (PMRY) launched in October 1993 with the objective
of providing self-employment opportunities to educated unemployed youth was
revamped in 1999 to enable the scheme to cater to a larger ambit of activities and allowing acceptance of
collateral for projects with higher cost.
The government has also taken a
number of initiatives in recent years, such as
ü
revitalizing of cooperative institutions and
RRBs,
ü
allowing banking entry into commodity markets to
operate on behalf of farmers, and
ü
promoting micro-finance and self-help groups in
the country.
Problems of Cooperatives
In the Indian
context, agricultural credit has played a vital role in supporting farm
production as majority of the farming community are marginal farmers that too
living below the poverty line. Although the outreach and amount of agricultural
credit have increased over the years, several weaknesses have crept in, which
have affected the viability and sustainability of these institutions. Of the
various institutions involved in the extension of credit to the agricultural
and allied activities, cooperative institutions at the doorstep of the farmers
have occupied a place of pride, taking into account the assistance of NABARD at
the apex level. Cooperative banks system accounts for the largest proportion of
total institutional credit to agriculture and allied activities in the rural
sector. However there has been a steady declining trend in the share of
cooperative banks in the flow of institutional credit over the years from 55
percent in 1984-85 to 40 percent in 1999-00 and further to 29 percent in
2004-05. Cooperatives in India
have traversed a long path over the
century of their existence since their
birth in 1904. A bill for the cooperative credit societies was drafted by Sir
Edward Law in 1901 with the objective of
assisting farmers, artisans and low-paid workers with credit with the
Cooperative Credit Societies Act, passed on 25th March, 1904, the
cooperative movement was formally launched in India . The pity is that will more than hundred years of
experience they are now at crossroads due to bad governance, political
interference, pliable managements and lax
regulation. Most of them have been small in size to be economical and viable
and a large number of them dormant and moribund. They suffer from
infrastructure weaknesses and operational inefficiencies and structural flaws.
Although
the cooperative credit delivery
institutions in the rural financial system have constituted an indispensable
credit outlet in disbursing timely and adequate credit to the needy and
poor-farmers in rural areas and have significantly contributed to the rapid
growth of the rural institutional infrastructure, yet with the opening up of
our economy and with the on-going financial sector reforms, these cooperatives
have come under severe pressure from the other competitive financial
institutions. In this context, there is
an urgent need for their revitalization in order to improve production and
productivity in the agricultural sector, making the farming community, the
happiest lot. Various groups and
committees have been constituted from time to time in order to review and
improve the functioning of the credit cooperatives. Groups and committees like
High Powered Committee, 1999 (Chairman- K. Madhava Rao), Task Force, 2000
(Chairman- Jagdish Kapoor) and Committee
on Experts, 2001 (Chairman- Prof. V.S.Vyas) were formed and they submitted
their reports on financial health and sustainability of the cooperative credit
structure in India .
Some of the
common problems faced by the cooperative credit institutions which had been
reported by these groups and committees include:
·
Poor recovery performance
·
Mounting overdues and non-performing assets
·
Low levels of diversification in business
operations
·
Inadequate loan physical system and credit
planning
·
Low capital base
·
Lack of corporate governance
·
Lack of appropriate system of financial
management
·
Lack of good leadership and management
Other problems include
- Lack of cohesiveness among the members of the cooperatives and lack of their knowledge about the nature and benefit of cooperatives.
- Inadequate motivation and low level of involvement of members- small, marginal farmers, rural poor artisans and weaker sections of the society for purchasing necessary inputs.
- Dual control of the State Government and RBI / NABARD
- Uneven distribution of cooperative benefits between different States.
- Wide variation in loan advanced per member
- Low membership in cooperatives
- Declining percentage of borrowing memberships
- Lack of democratization and professional management along with low-skilled staff.
- Low interest margin and high cost on credit.
- Overstaffing and high cost of management.
The cooperative
credit structure is weak in most of the states in India . As on 31st March 2004 , nearly half
of the retail outlets of cooperative credit institutions at the ground level
were making losses. The accumulated losses of the total system aggregated
around Rs.14,000 crore. Further the level of capitalization of cooperatives was
very low. Vaidyanathan Committee which
was constituted in 2004 has come up with an implementable action plan in the
centenary year of the cooperative movement.
Vaidyanathan
Committee has made various important recommendations that encompass all the
aspects of the functioning of cooperatives. An important recommendation of the
committee is extension of substantial financial assistance from the Central Government to
State Governments in prescribed ratios for cleansing the balance sheets and revival
of cooperative societies to give them a chance to survive in a competing
environment. Government of Andhra Pradesh signed a MOU with Government of India
on 29th August
2006 for implementation of the Vaidyanathan Committee
recommendations. Andhra Pradesh has got a network of 48 commercial banks, 5
Regional Rural Banks, 22 DCCBs and 2736 PACS operating in the State. In all
there are 5994 bank branches of which 2829 are rural branches. While the
financial position of the RRBs has looked up over the last few years, the
inherent weakness of the cooperative credit structure in the State of Andhra Pradesh has been
a matter of concern for NABARD from the time of its inception. Since the
cooperatives continued to be the backbone of the rural credit structure due to their many
inherent characteristics, strengthening this structure is, therefore, a
prerequisite if the credit requirements of the rural populace are to be
properly addressed. Thus, Andhra Pradesh become the first state to sign a MOU
with Central Government for implementation of Vaidyanathan Committee
recommendations so as to lead to full professionalisation of cooperatives in
the State and give them a chance to make a fresh beginning.
At present, the
rural credit market is rapidly changing with increasing number of players,
increasing competition and increasing leveraging of information technology.
Under such environment cooperatives need to introspect to find ways and means
on how to retain their market share and how to increase it over time. Cooperatives
must also bring about an attitudinal mindset overhaul leading to changes in the
methods of operations. The role of cooperatives in the context of
liberalization, privatization and globalization of Indian economy may need to
focus sharply on improving the quality of rural households through provision of
credit and non-credit services for all activities under primary, secondary and
tertiary sectors of rural economy such that credit can become an instrument of
creating large scale self-employment opportunities, thereby directly attacking
on the poverty of individual rural families.
Strategies and Suggestions
To
address the inherent and basic problems being faced by the cooperative credit
institutions and to strengthen their function effectively, Department of
Agriculture and Cooperation, Government of
India has proposed to launch a programme on recapitalization and
revamping of the cooperative credit structure during the Eleventh Plan (2008-13) period.
The
multifaceted strategies to revamp the cooperative banks in the county include,
·
Capital formation and loan appraisal - while
increasing the capital base of the cooperatives there must be an appropriate
credit planning and right loan appraisal system for ensuring viability and feasibility
in disbursing loans to the borrowing members.
·
Debt recovery – there should be ample
flexibility for the cooperatives to implement their own method of recovering
the dues from their members through group pressure.
·
Democratization – steps need to be taken to
ensure that the cooperative credit
institutions are member-driven, based on democratic principles.
·
Self-help - if the cooperatives could start operating as
micro-finance institutions by
organizing, adopting, promoting and financing SHGs, this could pave a
way to the economic uplift of the rural poor by empowering them through social
mobilization and economic activation.
·
Diversification of loans for new profitable
ventures - diversification of loans is the need of the hour. Credit support is
required for diversifying loans in order to enable a large number of farmers
and weaker sections to take loans for area- specific viable activities like
dairying, poultry farming, aquaculture, sericulture, goat and sheep rearing
etc. The cooperatives like SCARDBs and
PCARDBs should explore possibilities of financing various diversified
agro-related activities and exploit potential area of agricultural and rural
development.
·
Professionalism - Professionalisation of
cooperatives is a must along with modernization of their operational procedures
ensuring better managerial skill with efficient risk management, transparency,
accountability, quality services and achieving higher recovery ratio.
·
Diversification in export promotion activities -
the cooperative sector has a high potential to diversify itself in different
export promotion activities like processing of agricultural commodities like
tea, spices, cashew nuts, jute, coir,
sugar and its by-products etc.
·
Food processing potentials - the cooperatives
must avail of new advantages or opportunities in the Indian food sector.
·
Both system of audit- there is a need for better
audit of cooperative banks by professional chartered accountants.
The Government
of India’s policy initiatives for strengthening the rural credit delivery
mechanism has therefore, laid emphasis on enhancing flow of credit at the
grassroots level through an appropriate credit planning, adoption of
region-specific strategies and rationalization of lending policies and procedures.
Revitalization of the cooperative structure particularly in the sector of
agricultural credit as an important objective of the National Policy on
Cooperatives, April 2002, announced by the Government of India is a welcomed
step in the direction. Out of a multi-agency network of different banks,
including commercial banks, RRBs etc. the cooperatives are the ones which have
a vast network for supplying agricultural credit to the farming and rural
community. Hence, with a view to strengthening the cooperatives a two point
action plan should be implemented for increasing their outreach and improving
their profitability and viability.
Conclusions
The role of cooperative credit
delivery systems is significant in economic development especially for the
development of agriculture and rural areas. The structure of rural economy
largely depends on smooth, timely and adequate credit flow to the needy of the society. Therefore, a widespread
network and vibrant and effective credit
flow in rural India
is the need of the hour. Like a river
changes its course in tune with the terrain, financial institutions and
cooperative banks have to adapt themselves
to the changing needs of the society in
order to become sustainable. The present
thrust of the cooperative movement in India should be to build a
democratically vibrant, economically viable and self-reliant movement. Hence, there
is urgent need to reform the existing system of governance in cooperative
banks. Several recommendations for improving the governance of the banking
system have been made by various committees appointed from time to time by the
RBI and the NABARD. It is high time that these recommendations that have not
yet been adopted are given serious consideration by the authorities concerned
viz., the RBI, NABARD, Ministry of
Finance, Government of India and the State Governments and implemented
immediately in the best interest of the rural population.
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Reference-Websites:
www.nabard.org
[NABARD]
www.rural.nic.in/drda.htm [DRDA]
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[Ministry of Rural Development]
www.ari.nic.in [Ministry
of Agro and Rural Industries]
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