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Revival of Cooperative Credit Institutions – Recommendations of the

Vaidyanathan Committee

Article · March 2005

DOI: 10.13140/2.1.3277.7605

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 Revival of Cooperative Credit Institutions – Recommendations of the
Vaidyanathan Committee

E.V. Murray *

The Cooperative Credit Structure plays an important role in delivering Agricultural

and Rural credit. That the structure has become weak and requires immediate
attention is well recognized. The issue is where to begin and how to go about the
process of revival. This was the brief given to The Task Force on Revival of
Cooperative Credit Institutions.

Several committees have examined the problems facing the Cooperative Credit
Structure in the recent past such as the Kapur Committee (1999), Vyas
Committee (2001) and more recently the Vikhe Patil Committee (2002).
However, the Government of India thought it necessary to have an
implementable action plan and also get a fair assessment of the extent of
financial resources that it would have to commit to the revival exercise. Hence
the Government of India constituted the Task Force on Revival of Cooperative
Credit Institutions in August 2004.

The Chairman of The Task Force was Prof. A Vaidyanathan, Emeritus Professor,
Madras Institute of Development Studies, Chennai. The other members were
S/Shri. M. Rama Reddy, President, Sahavikasa Cooperative Development
Foundation, Hyderabad, Prof. MS Sriram, IIM Ahmedabad, AK Singh, Additional
Secretary, Ministry of Agriculture, Govt. of India, HS Chahar, Secretary,
Cooperation, Govt. of Orissa, LM Chaube, MD UP State Cooperative Bank, UC
Sarangi, Commissioner for Cooperation, Govt. of Maharashtra, and YSP Thorat,
MD NABARD. S/Shri AV Sardesai, ED and KD Zacharias, Legal Advisor,
Reserve Bank of India were permanent invitees on the Task Force.

* Faculty Member, College of Agricultural Banking, Reserve Bank of India, Pune

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The Terms of Reference of the committee constituted in August 2004 were as
follows:
(i) To recommend an implementable action plan for reviving the Rural
Cooperative Banking Institutions, taking into consideration, inter-alia,
and the main recommendations made by various committees in this
regard.
(ii) To suggest an appropriate framework and the amendments which may
be necessary for the purpose in the relevant laws.
(iii) To make an assessment of the financial assistance that the
Cooperative Banking Institutions will require for revival, the mode of
such assistance, it’s sharing pattern and phasing.
(iv) To suggest any other measures required for improving the efficiency
and viability of Rural Cooperative Credit Institutions.

The Task Force due to constraints of time, addressed the issue of revival of the
Short Term Credit Structure, and has suggested constitution of a separate
committee to examine the issues pertaining to the Long Term Credit Structure.

The Task Force submitted its' report to the Union Finance Minister on 5 January
2005. With the announcement by the Union Finance Minister in his budget
speech of 28 February 2005 that the recommendations had been accepted ‘in
principle’ by the Union Government, the Cooperative Credit Structure is hopefully
one step closer to it’s’ revival.

Evolution of the Cooperative Movement

The Task Force goes back to the 1900's and traces the role played by officials of
the colonial Government of those days in promoting cooperatives based on the
remarkable success achieved in Europe, with the noble objective of liberating
Indian farmers from the crushing debt burden and the tyranny of moneylenders.

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The Task Force has categorized the 1930-1950 period as the Second Phase
when the Reserve Bank of India began to extend refinance to the cooperative
system. The Third Phase (1950-1990) is the post Independence Phase, where,
"rapid and equitable economic development became the central focus of state
policy". State Policy was perused with the view that, "the Government should
ensure adequate supply of cheap institutional credit to rural areas through
cooperatives".

The establishment of NABARD in 1982 on the recommendation of the Sivaraman

Committee "heightened the State's interest in and concern for the performance of
the cooperatives in the country". The State gave primacy to cooperatives as the
sole means of delivering institutional credit to rural areas and injected large and
increasing amounts of funds directly. "Along with directed resource flows came
the increased interference by the State in all aspects of functioning of the
cooperatives. The consequent interference went to the extent of "compelling
them to compromise on the usual norms for credit worthiness, which ultimately
began to affect the quality of the portfolio of the cooperatives”. "The infusion of
additional capital and "professional" work force (deputationists?) resulted in “the
State and work-force beginning to behave like patrons". The Committee
observed that, the Government of India's Loan Waiver Scheme of 1989, "writing
off loans of farmers, greatly aggravated the already weak credit discipline in the
cooperative system and led to the erosion of its financial health. It also set an
unhealthy precedent and spawned a series of schemes by the State
Governments, announcing waivers of various magnitude, ranging from interest
write off to partial loan write-offs".

It was around this time that concerns began to be voiced about the deteriorating
health of the structure and the search began to explore ways to revitalise the
cooperatives.

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The fourth phase as defined by the Committee is the post 1990 period to the
present, when the quest for reviving and revitalizing the cooperative movement
continued.

During this time several committees notably those headed by Chaudhry Brahm
Perkash, Jagdish Kapoor, Vikhe Patil and V.S. Vyas examined the sector in great
detail. One of the solutions that offered a glimmer of hope was the Model
Cooperative Law suggested by the Brahm Perkash Committee, "which could
make the cooperatives self reliant, autonomous and fully democratic institutions".

The progress however has been very tardy and only nine states have passed
legislations on the pattern suggested by the Brahm Perkash Committee. Only
Commodity Cooperatives have migrated to the new liberal act. However, "the
new law did lead to the emergence of new generation autonomous financial
cooperatives albeit slowly and unevenly across the country".

Assessing the Extent of Impairment

The Task Force went about assessing the extent of impairment of the system in
a wider perspective of Governance, Management and Financial Health. The
following is a brief summary of their assessment.

Poor Information Base

The Task Force has explained at length, the absence of a reliable database on
the financials of the Cooperative Credit Structure, which they observed as a
major area requiring attention. It has made two major suggestions in this regard.

 NABARD to work with Institute of Chartered Accountants of India to

develop and publish appropriate standards and that the use of these
for financial reporting be made mandatory.

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  NABARD to set up a Department of Statistical Analysis staffed by
appropriately qualified human resources to ensure that data on the
(Cooperative) Credit System is collected and used meaningfully.

Role of Cooperatives in provision of Agricultural Credit

The Task Force reviewed the Current Status of Agricultural Credit and the role of
the Cooperative Credit Structure. While the share of the cooperatives increased
in absolute terms from Rs. 9,378 crores in 1992-93 to Rs. 23,636 crores in 2002-
03, the percentage share dropped from 62% to 34%. The corresponding share
of the Commercial Banks grew from 33% to 57%, with the balance being that of
the Regional Rural Banks.

However, the Task Force has noted that out of the total estimated 8 crore
borrowers, about 6.4 crore borrowers are served by the cooperative structure
with the average loan size being around Rs. 31,600/- for the Commercial Banks
and Rs. 6,600/- for the cooperatives. These data clearly indicate the reach of the
cooperatives and their focus on the small borrowers as compared to Commercial
Banks.

Impairment in Governance

On the impairment in Governance, the Task Force observed that, "the

impairment of governance is deep and is represented by the composition of the
boards of directors of the cooperatives and the reporting systems. Because of
the structural ordering, the lower tiers are managed by the higher tiers in varying
degrees of detail in different States. In almost all States, the function of
conducting elections for the cooperative structure is vested with the State
Government. Similarly, the function of auditing is also vested with a State-run
audit system".
The points made in support of the observation of the impairment in Governance
are:

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  Non conduct of elections and supersession of boards
 State Governments combining the role of Dominant Shareholder,
Manager, Regulation and Auditor
 Registrar of Cooperative Societies (RCS) taking decisions on
administrative matters in cooperatives
 RCS interfering in financial matters of the cooperatives
 Politicisation of Boards – Directors being involved in active politics
 Pendancy in audit of accounts of the cooperative

On external regulation and supervision the Task Force observed that:

 PACS are being excluded from the scope of B.R. Act 1949
 The minimum capital requirement for cooperatives is very low
 Capital to Risk Weighted Asset Ratio (CRAR) norms have not been
prescribed for SCBs and DCCBs

Impairment in Management

On the impairment in management, the Task Force has made the following
observations:

 There was deputation of State Government officials to top positions in

cooperatives
 Setting up of common cadre posts for management of PACS led to
such employers not feeling accountable to PACS
 The cooperatives had an ageing staff profile with inadequate
professional qualification and low levels of training
 The delineation between the Governance and management function
were unclear, leading to boards taking up issue of operational nature
 There was poor housekeeping and weak internal control system.

Financial Performance

The Task Force also made an assessment of financial impairment based on

published data. Eight of the 30 SCBs have eroded their net worth with

6
accumulated losses totaling Rs. 281 crores, while in the case of DCCBs, 144 out
of 367 had accumulated losses of Rs. 4401 crore as an end of financial year
2002-03. For the PACS, whose data reliability is questioned by the Task Force
53,626 PACS of the 112,309 are in losses, with total accumulated losses
estimated at Rs. 4595 crores.
Recovery and NPA

The recovery rate of the SCBs was 79% in 2002-03 (as against 82% in 2000-01).
For DCCBs it was 61% (67%) and for PACS 62% (65%). The Task Force
however expresses doubts about the reliability of this data and States that "the
picture presented may seem more optimistic than the reality"
The Task Force also makes a passing reference to the Imbalances in the
Cooperative Structure where the outstanding loans exist in the higher tier even
for loans recovered and extinguished in the lower tier. The Task Force attributes
this situation to poor loan recovery, high overheads and frauds.

Costs and Margins

The Task Force also examined the issue of yield on assets, cost of funds and
margin available to SCBs and DCCBs and observed that while financial margin
(yield on assets less cost of funds) was reasonable, high transaction and risk
cost were eroding the margins.

Approach to Revival
The Task Force has reaffirmed the importance of the Cooperative Structure
stating that, "Cooperatives, of the mutual thrift and credit type are the only form of
organisation by which economically disadvantaged individuals and groups could,
through voluntary collective action, overcome their disadvantageous position in
an unequal market and promote their well being". They have agreed with the
recommendation of various committees that the CCS need:

 Financial assistance to wipe out accumulated losses and strengthen

capital base

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  Restructuring the institutions to make them more democratic, member
driven, autonomous and self-reliant
 There is need for a radical change in the legal framework
 Improvement in quality of personnel in all tiers and at all levels through
Capacity Building and other interventions.
Assessing the Revival Package

Eligible Purposes

The Task Force took the position that the Financial Package should enable
eligible institution to (1) clear accumulated losses, (2) maintain minimum capital
(3) retire equity capital of the State Government. In addition, the cost of technical
assessment for upgrading human resources and management systems should
be covered.

Accumulated Losses

The Task Force after examining the idea of financing only the accumulated
losses from agricultural loans, rejected it, "as it would tantamount to partial
recapitalisation and would not bring the cooperatives out of the financial morass".

However, to get an accurate picture, the Task Force has suggested "engagement
of specially designated auditors on a fee-based arrangement (to get) the true and
fair picture of the institution-wise accumulated losses at all levels".

Capital to Risk weighted Asset Ratio (CRAR)

The Task Force has recommended that CRAR should be extended to the CCS
and suggested initial capital support to achieve 7% CRAR, which through internal
accruals should grow to 9% in 3 years and 12% in five years.

Retirement of Government Share Capital

Government Share Capital has been identified by the Task Force as the root of
all ills ailing the CCS and said "this initiative has, over time, been the single most

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important cause for bureaucratisation of the system and for the intrusive and
pervasive control by the State Governments over all aspects of cooperative
functioning". The Task Force has said that return back of equity contribution
made by the State Government ”constitutes an important cornerstone of its
recommendations". The Task Force has provided for extension of soft loan to
the CCS to return the State Government equity.
Technical Assistance

The Task Force has made a provision for capital support for (i) special audits to
obtain a true and fair assessment of the financial support required by CCS, (ii)
Hardware and Software costs for developing a Common Accounting and
Management Information System.

The Task Force observed that the current trainings for the CCS are "archaic,
outdated and focused more on history of cooperation and legal enactments than
on matters pertaining to business". They have suggested standardization of
training programmes and curricula for which a joint group has been suggested
under the chairmanship of NABARD. Provision for funding these costs has been
made.

Eligible Institutions

The Task Force examined and rejected the suggestion that all the units in the
CCS must be capitalized, on the grounds that, "there exist cooperatives at
different levels whose performance is so poor that no amount of capitalization
can address their infirmities". The Task Force has laid down clearly quantifiable
criteria for identifying institutions that would be eligible for support. They are :

Institutions Criteria
PACS (1) Gross Interest Margin > = 50% of operating
expenses (2) Recovery > = 50% of demand
DCCBs and SCBs Positive net worth or with negative net worth with
deposit erosion < 25%

Quantum of Assistance

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The Task Force has made a bottom-up approach for assessing the resource
requirement within the constraint of the data available and its reliability.
However, the recommendation made is that actual assistance would be based on
the audited balance sheet as at end March 2004.

Assessment of Losses

The assessment of losses at various tiers have been indicated as follows :

PACS
(Rs. Crores)

(i) Losses arising out of credit business 3170

(ii) Losses arising out of non-credit business 1425

DCCB

Of the accumulated losses of DCCBs of Rs. 4401 crore, it is estimated that Rs.
2314 crore will be off set from the credit losses of PACS. The balance losses of
DCCBs relate to others businesses like DCCBs lending to societies other than
PACS, direct lending by DCCBs for agricultural and non-agricultural purposes.

SCB

The accumulated losses of SCBs as per their books aggregated to Rs. 281 crore.

Invoked Guarantees

Another major area requiring funding is the State Government guarantees to

SCBs and DCCBs amounting to Rs. 827 crore and Rs. 337 crore respectively
that have been invoked by the banks but not paid by the State Governments.

Waiver Schemes

Further, an aggregate sum of Rs. 720 crore is due to the cooperative from the
State Governments under various loan waiver, interest waiver and interest
subsidy schemes.

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Support to attain stipulated CRAR

The capital required for the CCS to reach CRAR of 7% initially has also been
suggested as a part of the assistance. The amount required for this has not
been assessed, but the view of the Task Force is that it would not be large.
Retirement of Government Share Capital
The Task Force has assessed that a sum of Rs. 1243 crore is required to retire
the Share Capital of the Government in Cooperatives, consisting of Rs. 619 crore
in PACS, Rs. 521 crore in DCCBs and Rs. 103 crore in SCBs.
Overall dimensions of the Financial Package

The overall magnitude of the Financial Package as assessed by the Task Force
is Rs. 10,839 crore. In view of the various information and data gaps existing, a
sum of Rs. 4000 crore has been provided towards contingencies, bringing the
total requirement to Rs. 14,839 crores.
Sharing Pattern

The Task Force has suggested the sharing of liability on the basis of origin of
such losses. For instance, in the PACS, losses arisen out of credit business will
be borne by the Union Government while losses from non-credit business will be
borne by the State Government. Similarly, at the DCCB level, losses on account
of business directly done by the DCCB will have to be borne by the bank.
Overall, the Task Force has suggested the following funding pattern.

Type of funding Amount Components

(Rs. in
crore)
Grant by Government of 5793 Losses of PACS on account of credit
India business + Agricultural Credit Losses of
DCCBs/SCBs and Implementation
Costs.
Soft loan by Government 3402 Losses on account of non-credit
of India to State business of PACS, guarantees invoked
Government unpaid and other government
receivables to CCS.

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Soft loan by Government 1664 Return of Government equity, Losses
of India to CCS from non-agricultural credit business,
capital to attain CRAR of 7%.
Total 10,839

Institutional Regulatory and Legal Reforms

The Task Force has unequivocally stated that "Cooperative can only be revived if
they become democratic, self-governing, self reliant organizations for mutual
thrift and credit". For this, "a radical change is necessary in the way Cooperative
Credit Societies are constituted, managed and regulated".

Further, the Task Force has recommended dealing with the rural financial
cooperatives as a separate class of cooperatives and a separate chapter in the
Cooperative Societies Act for the Cooperative Banks.

The Task Force has proposed Legal and Regulatory reforms mainly to :

 Remove State intervention in the cooperatives

 Ensure full voting rights to all users of financial services
 Facilitation of effective exercise of regulatory authority by the Reserve
Bank of India.

Implementation Mechanism

The Task Force has recommended that NABARD be designated the Nodal
Implementation and Pass Through Agency (NIPTA) for the entire programme
with review committees being constituted at the National, State and District level.

It has also suggested that the scheme be kept open for a period of two years for
the States to decide on participation and the implementation period be 3 years
from the date of acceptance of the scheme by the States.

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 Transitional Arrangements

The Task Force forsees a period of transition when the implementation of the
revival process commences. In the process, some areas may have periods
when credit flow could be disrupted. The Task Force does not see this as a
major hurdle and explains several options available such as taking over the area
by neighbouring PACS, DCCB, Commercial Banks or RRBs. The Task Force
also envisages a future scenario where the Self Help Groups or Joint Liability
Groups grow and graduate to the level of meeting the credit needy of "those who
have little or no productive assets, own very small tracts of land, tenant farmers
and landless who constitute a large majority of the rural population and who
hardly benefit from cooperative credit (at present)".

In conclusion, the Task Force has once again emphasised the need for legal and
institutional reforms in the cooperative credit structure to make them member
centric, self-governing and democratic institutions. They also caution that this
would be a gradual process and should not be (unduly) hastened.

It is hoped that with the roadmap to revival being ready, the cooperatives will
begin their journey towards transformation into vibrant credit institutions.

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