Ministry of Cooperation: the financial weight of cooperatives seen behind the Center’s request for greater control

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There are around 8.5 lakh of cooperatives in the country with around 38 crore of members. Of these, 1,539 are Urban Cooperative Banks (UCBs) and 97,006 are rural banks with a combined asset size of up to Rs 17-18 lakh crore, an official source told FE.

From a small wing of the Ministry of Agriculture with less than a dozen employees in any corner of Krishi Bhawan, the cooperation department transformed last week into a full-fledged ministry, with Amit Shah at its head, is considered to have not only a political role but economic ramifications.

There are around 8.5 lakh of cooperatives in the country with around 38 crore of members. Of these, 1,539 are Urban Cooperative Banks (UCBs) and 97,006 are rural banks with a combined asset size of up to Rs 17-18 lakh crore, an official source told FE.

These cooperative banks, both urban and rural, represent an extremely important part of the finances of the cooperative sector. While many of them are deprived of capital and riddled with management problems, the cooperative banking sector as a whole still retains great financial and political influence over voters at the critical local level. In this context, the Centre’s attempt to regulate policies governing cooperatives through the new ministry makes sense.

Some of the large UCBs are rich in cash, which makes them a powerful financial force. The deposit base of UCB stood at Rs 5 lakh crore in March 2020 (deposits constitute about 90% of the resource base of cooperatives). Their loan portfolio reached Rs 3 lakh crore at the end of FY20, constituting a significant share of credit flows throughout the cooperative sector, mainly to agriculture.

Likewise, UCB liquidity reserves increased by 7.9% year on year to reach Rs 5,812 crore in FY20 and balances with banks increased by 8.6% to reach 66,212 Rs. crores. Their investments amounted to Rs 1.62 lakh crore in FY20, of which 60% in central government securities and 27% in state government papers. Their asset size stood at Rs 6.2 lakh crore as of March 2020.

Once the financial data of the rural cooperative banks is included, the asset size jumps substantially. These rural cooperatives represent 65% of the total asset size of all cooperative banks combined, according to an RBI assessment.

Given the financial prowess of many co-ops and the large number of their members, political parties that exercise considerable control over them potentially have a significant advantage over others in election time. For example, Congress and the PCN have enormous influence over them in Maharashtra, the BJP in Gujarat, and left-wing parties in Kerala.

No wonder the opposition parties called the decision to separate the Ministry of Cooperation from the Ministry of Agriculture a “political mischief” and an attack on the country’s federal structure. Cooperatives, being a state subject (the role of the Union government is mainly limited to multi-state cooperative societies), should be supervised by the states and the new ministry should not be used to usurp their power or curb their innovation, they say.

For example, to finance development activities and facilitate credit flows to farmers, Kerala formed the Kerala Cooperative Bank (KCB) (under the name Kerala Bank) by merging the district cooperative banks. KCB is today the largest cooperative bank in the country with no less than 820 branches. The State Cooperation Ministry lists up to 11,892 cooperative societies that operate in all sectors, including agriculture, dairy, industry, and services such as banking and hospitality.

More importantly, many co-ops, thanks to their opaque structure and serious governance issues, are said to be used to funnel black money. The crisis of the Punjab Maharashtra Co-operative (PMC) Bank and others in recent years bears witness to this.

Of course, the government last year amended the Banking Regulation Act to bring urban and multi-state cooperative banks into RBI regulation. While this move is intended to protect the interests of depositors and to better control the affairs of these cooperative banks, given the enormity of the task, strict supervision and regulation will take some time to evolve towards the desired standards. In addition, the scope of the RBI regulation is limited to banking service providers only and does not cover the entire universe of cooperatives.

According to the notification issued by the government, the new ministry will deal with general policy in the field of cooperation while other relevant ministries will be responsible for cooperatives in their respective fields. For example, IFFCO will continue to be guided by the policies of the Ministry of Fertilizers and the Gujarat Cooperative Milk Marketing Federation (Amul) by the Ministry of Dairy Products. The Nafed agricultural cooperative, which deals with the supply of oilseeds and pulses, will remain at the Ministry of Agriculture.

Thus, the new ministry will oversee the central registrar of cooperative societies which regulates and governs all multi-state cooperative societies, a function that was previously performed by the Ministry of Agriculture.

The step is gaining in importance as some of the financial companies have reportedly been converted into multi-state cooperatives to evade regulators like RBI and Sebi.

As of December 2020, there were 1,469 registered multi-state cooperative societies. Maharashtra led the states with 622 of them, followed by Delhi (153), Uttar Pradesh (149), Tamil Nadu (124) and Rajasthan (74).

Dismissing criticism of the move, government officials say the much neglected cooperative sector will now receive its fair share of attention following the formation of a dedicated ministry and catalyze a bottom-up growth approach. This will strengthen the country’s cooperative movement and deepen its reach at the local level, they add.

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