Duvvuri Subbarao: Leveraging cooperative advantage
Inaugural address by Dr Duvvuri Subbarao, Governor of the Reserve Bank of India, at the
International Conference on "Leveraging cooperative advantage" as part of celebrating the
International Year of Cooperatives at the College of Agricultural Banking, Pune,
16 November 2012.
* * *
1. Thank you very much for inviting me to inaugurate this two day International
Conference on "Leveraging Cooperative Advantage" organized to celebrate the International
Year of Cooperatives declared by the United Nations (UN). This is an opportunity to which I
attach a lot of value.
2. The year-long celebration of cooperatives all over the world gives us an opportunity
to revisit "the strengths of the cooperative business model as an alternative means of doing
business and furthering socio-economic development." I am delighted too that the Reserve
Bank's College of Agricultural Banking is hosting this Conference. When it was first set up,
this College had a specific mandate for capacity building of personnel in rural and
cooperative sectors. Hosting this Conference is therefore an opportunity for the College to
broadbase its expertise in this area by learning from international experience.
3. There is a common perception around the world that the original rationale for
cooperatives has ebbed away, and that in today's complex, globalising world, there is no
meaningful role for cooperatives. That is clearly a misperception. Indeed I will argue to the
contrary - that precisely because today's world is complex and globalising, there is a more
meaningful role for cooperatives to play. But let me first attempt to outline what exactly is
meant by a cooperative.
Defining cooperatives - an aggregation of power for business goals
4. There are several formal definitions of the cooperatives, but at the very core,
cooperatives are member-owned businesses. Their rationale draws from the strength of
aggregation. Cooperatives aggregate the power of people who, on their own, would find it
difficult to achieve their business goals. They are thus unique entities in the sense that they
are member- owned, member-driven and member-controlled businesses.
5. The way cooperatives are organized, they provide a third alternative with free
market organisations at the one end (which provide goods and services through exchanges
in the market) and the state owned organisations at the other (which provides goods and
services through state control). Without going into the details of the theoretical exposition, I
can safely say that cooperation emerges when it either reduces the cost and / or increases
the benefits to the prospective members by undertaking an activity of common interest. In
case of financial cooperatives, this translates to increasing the return on savings and
reducing the interest on loans to members after making sure that there are adequate margins
to plough back surpluses for future sustainability and growth.
Rationale and relevance of cooperatives today
6. Let me now return to the question of the rationale of cooperatives in today's world.
As I mentioned at the outset, cooperatives have a very meaningful role to play in today's
complex, globalising world for at least two important reasons.
7. Over the past 60 years, we have seen several episodes of economic growth in
different parts of the world. One clear lesson of this experience is that growth is sustainable
only if it is inclusive. A growth process that increases inequity lacks durability, and indeed
even legitimacy, eventually threatening economic and social stability. Evidence in support of
this is overwhelming - the "Occupy Wall Street" movement of last year being just the latest
manifestation of the discontent associated with inequitable growth. Governments around the
world are therefore anxious that even as they pursue economic growth, they must make that
growth process inclusive. There are many ways of understanding inclusive growth: the way I
understand it is that inclusive growth is a process where the poor contribute to growth and
from
the poor benefit growth. From this perspective, the cooperative system can become an
effective instrumentality for inclusive growth and a powerful platform for enfranchising the
less privileged.
8. There is a second and equally powerful argument that reinforces the importance of
cooperatives. The recent financial crisis has taught us some very important lessons. The
general disenchantment with "casino banking" in certain developed economies underscored
the dangers of over-financialization of the real economy.
9. In comparison, the cooperative business has been more resilient. Its source of
stability is the inclusiveness embedded in its very structure: "as owned by members and for
the members." This structure ensures that cooperatives are not enterprises run just for short
term profits, but are a business model for long term sustainability and inclusive growth.
10. In case of financial cooperatives, they do basic banking and do not indulge in
investment banking or trading; they are not dependent on bulk or wholesale markets for
funding. They buy and hold, and in their lending, they depend more on their knowledge of the
borrower rather than on the collateral that can lose value rapidly. They bring in bio-diversity
in the financial landscape. Hence the cooperative philosophy is an excellent example of a
value based business model. As the UN Secretary General Ban Ki-moon put it,
"Cooperatives are a reminder to the international community that it is possible to pursue both
economic viability and social responsibility." Quite understandably, the experience of the
global financial crisis has generated serious thinking about cooperatives as a bulwark for
financial stability.
Are cooperatives on the decline?
11. Notwithstanding the above arguments in support of the rationale of cooperatives,
there is a stereotype view that cooperatives are on the decline. Evidence, however, is to the
contrary. A recent study by ILO1 cites evidence that the cooperative business model is a
sustainable form of enterprise that is able to withstand a crisis. The study also addresses
questions like whether cooperatives only succeed at a time of economic crisis. Are they a
business model that people turn to when needed, only to return to the dominant
investorowned model when the crisis is over? The study concludes that there is no evidence in
support of this. In fact, it is the strength built up by cooperatives during the good times that
helps them tide over a recession.
Evolution of cooperatives - global experience
12. Globally, the cooperative movement covers over one billion people generating
economic activity, resources and jobs. Countries with the most significant numbers of people
in cooperative membership are India, China and the United States. Countries with significant
presence of cooperative banks are Germany, France, the Netherlands and Italy.
13. Experience from around the world shows that cooperatives have been strong in
countries where they have received definitive policy support from the respective
governments in the initial stages. How they later evolved differs from country to country. Two
main factors have worked in their success viz., the degree of government control and the
extent of member participation. In today's technology driven globalised environment, it also
matters whether and to what extent they are prepared to face competition.
Evolution of cooperatives - Indian experience
14. The growth of cooperatives in India has been impressive and covers a wide array of
activities including credit & banking, fertilizer, sugar, dairy, marketing, consumer goods,
handloom, handicraft, fisheries, housing etc. The Indian cooperative movement, comprising
around six hundred thousand cooperatives is arguably the largest cooperative movement in
the world, providing self employment to millions of poor. There are stellar success stories like
"Amul" owned by the Gujarat Cooperative Milk Marketing Federation (GCMMF) and Self
Employed Women Association (SEWA), Gujarat. Among consumer cooperatives, the trail
blazer has been Warana Bazaar, Warananagar, Kolhapur. Beyond these high profile
success stories though, the story of Indian cooperatives has been varied. There are heart
warming successes as also disappointing, if not dispiriting, failures.
Cooperative movement - driven by state policy
15. In India, state policy and support played a major role in the development of the
cooperative movement. Historically, the passing of the Cooperative Credit Societies Act in
1904 and a more comprehensive Cooperative Societies Act later in 1912 marked the
beginning of state policy of active engagement and promotion of cooperatives. Further
impetus for state support came from a study by Frederic Nicholson, followed by the Edward
Law Committee on Cooperative Legislation. In 1915, the Maclagan Committee reiterated and
advocated that "there should be one cooperative for every village and every village should be
covered by a cooperative".
16. In the subsequent decades, the Reserve Bank of India played a vital role in the
development of the cooperative movement in the country. There were specific provisions in
the Reserve Bank of India Act, 1934 both for the establishment of an Agricultural Credit
Department (ACD) in the bank and for extending refinance facilities to the cooperative credit
system. A seminal landmark in the history of cooperative credit and banking was the All India
Rural Credit Survey in 1954, conducted by the Reserve Bank. Based on the experience of
India and several other developing countries, the Committee stressed that: "no form of credit
organisation at the rural base will be suitable except the cooperative society". The integrated
scheme of rural credit, introduced pursuant to the Committee's recommendations, gave a big
boost to the country's cooperative movement.
17. As the planning process by way of the five year plans took root in the
postindependence period, "building up a cooperative sector as part of a scheme of planned
development" became one of the central aims of national policy. The planning process was
driven by the principle that: "Cooperation should become, progressively, the principal basis of
organization in branches of economic life, notably agriculture, minor irrigation, small
industries, processing, marketing, distribution, rural electrification, housing, construction and
provision of essential amenities for local communities. Even in the medium and large
industries and transport sectors, an increasing range of activities could be undertaken on
cooperative lines."
18. Over the years, the importance of cooperatives increased well beyond a business
form to a more broad based development philosophy to fulfil the common economic
aspirations of the poor and disadvantaged. This narrative suggests that growing state faith
played a critical role in evolution of cooperatives.
Cooperatives also driven by the land holding pattern
19. In addition to state policy, the changing pattern of landholding in India aided the
spread of cooperatives.
20. During the 50s and 60s, more than a fourth of the total cultivable land was held by
large farmers. By the year 1995-96, this picture changed significantly with large farms
yielding ground to small and marginal farms whose share increased both by way of number
of operational holdings as well as operational area. As per the latest agricultural census
(2005-06), small and marginal farmers, having less than 2 hectares of land, accounted for
83 per cent of the total number of operational holdings and 41 per cent of the operated area.
It is this class of "small" farmers, operating at the margins - socially as well as financially,
with low income base and limited market orientation, vulnerable to climate changes and
facing considerable risk in their agricultural operations - that define the profile of the clientele
of cooperatives. The average size of loans disbursed by the cooperatives works out to about
30,000, as against 1,38,000 disbursed by the commercial banks (2010). The difference
evidences the nature of the cooperatives and their clients.
Still they seem to be losing out - problems in the rural cooperative credit system
21. As indicated above, the cooperative movement in India has had the support of state
policy and also the landholding pattern. Yet, cooperatives seem to be losing out on business
share. The market share of rural cooperative banks in India has been continually receding -
from 7.2 per cent in 2001 to 3.7 per cent in 20102. If the share of cooperatives declines
further, they may lose their role as an important player in rural credit. This raises an
important policy question. Can a process such as the cooperatives be driven entirely as a top
down process? Isn't bottom up support a necessary condition for the cooperative movement
to thrive?
Why is the cooperative system faltering?
22. There are several reasons for the disappointing performance of cooperatives in the
country calling into question their viability and sustainability. I will reflect briefly on the more
important ones.
(i) The Short Term Cooperative Credit Structure (STCCS), which once played a major
role in the growth of agriculture by supporting small and marginal farmers, seems to
be on the decline. Until the early 1990s, cooperatives provided almost 62 per cent of
the agri-credit in the country, but over the years, their share has declined, going
down to 16 per cent by 2009-10.
(ii) Several factors have led to the deceleration of credit flow to agricultural and rural
development activities. State intervention into and politicization of these primarily
democratic and member governed cooperative institutions has impaired their
governance both on managerial and financial fronts. Examples of governance
impairment include non-conduct of elections, frequent supersession of boards, delay
in audit and states' intrusion into administrative and financial management.
(iii) The Task Force appointed by Government of India (GoI) for revival of the
cooperatives noted that impairment in governance was deep. The State often
combined the role of the dominant shareholder, manager, regulator, concurrent
supervisor and auditor creating severe conflicts of interest. Cooperatives were also
required to function by administrative boundaries and were often divided into smaller
entities just because of division of panchayats, districts or states.
(iv) Weak finances, growing NPAs and poor resource base are factors contributing to
the declining performance of the cooperatives at the bottom level. These grass root
institutions mostly depend on the higher agencies, i.e. central cooperative banks
(CCBs) which, in turn, have to borrow from the next higher agencies. There is thus,
a chain of dependency at all levels of the cooperative credit structure for resources
from the outside.
(v) The cooperative structure is biased in favour of borrowers, and depositors get an
unequal treatment. Only borrowers can become members of the cooperative.
Depositors are either non-members or "nominal" members with no voting rights.
First, this goes against the concept of mutuality (thrift and credit going hand in
hand). Second, it is not fair to depositors that their money is being intermediated by
the cooperatives without their having any say in the management.
(vi) There are other developments that have constrained the growth of cooperatives.
They have been unable to cope with the rapid pace of change in the financial sector.
New products and services, application of technology and adoption of advanced
management practices have improved the efficiency and driven the margins down in
the financial sector. While other players have adjusted to these changes,
cooperatives have lagged behind. This pulled them into a vicious cycle of falling
business, poor governance and weak human resources.
23. The declining share of cooperatives in rural credit is worrisome especially since they
are oftentimes the only source of support for small and marginal farmers. The health of the
long term cooperative credit structure is also a cause for concern as it affects capital
formation and hence productivity in agriculture.
Yet their outreach is their strength and they need to leverage on this
24. Do all the infirmities I have outlined above mean that cooperative institutions do not
have any positives and are not relevant today? The answer is clearly no. Their vast network,
with over 100,000 live outlets of the Short Term Cooperative Credit Structure (STCCS), is a
major strength. I believe there is no other institution that has this depth of penetration for
purveying credit and mobilisation of resources. How then do we leverage on this strength of
cooperatives, especially for furthering financial inclusion in the country?
25. The three tier STCCS consists of more than a hundred thousand primary agricultural
credit societies, (PACS), nearly four hundred District Central Cooperative Banks (DCCBs)
with 13,000 branches and 31 State Cooperative Banks with nearly one thousand branches.
26. More significant - besides the numbers - is the location of these outlets. The
number of PACS located in hilly terrains, deserts and other areas with poor access far
exceed the number of rural branches of commercial banks and RRBs. Located as they are in
the rural areas, the STCCS units have better knowledge of their existing and potential clients.
The large cooperative structure with deep penetration and endowment of local knowledge is
an ideal platform for furthering financial inclusion. Arguably, cooperatives have been in the
business of financial inclusion long before the phrase became fashionable.
27. Notwithstanding the above advantages, PACS were not formally recognized as
Business Correspondents and were not formally integrated into the Financial Inclusion
Programme (FIP) at par with commercial banks and Regional Rural Banks. The DCCBs were
not allocated any villages despite the fact that a large chunk of rural population held their
bank accounts in DCCB and SCB branches. One reason is that these banks are not
technology driven
sufficiently technology-enabled to participate in the Financial Inclusion
Programme. To redress this handicap, as part of its mandate of institutional development,
NABARD has embarked on an ambitious effort to bring the cooperative banks on a common
technology platform in a phased manner. They should then be ready to be integrated into the
FIP provided there is also an improvement in their financial health.
Reviving the cooperative structure - what needs to be done?
28. If the inherent advantages of cooperatives as member-owned and operated entities
is to be realized and they are to play a meaningful and sustained role in financial inclusion,
many of the above constraints and handicaps will need to be urgently addressed. Let me
briefly outline the agenda in this regard.
Improve professionalism in governance / management
29. Governance in Cooperative Banks lacks professionalism. There is need to
professionalize both the governance structure and the functioning of these institutions. First,
governance has to be segregated from management. The Board must restrict its role to
governance and allow the CEO and the senior management to manage the day to day
operations of these entities. The Board can exercise oversight over the management through
established channels like reviews in Board Meetings and by seeking progress reports and
information. There is also a need for stringently applying the "fit and proper" criteria to
personnel considered for managerial positions in these institutions.
Address poor financial status
30. The deteriorating financial position of unlicensed cooperative banks is an issue of
concern. Of the 402 cooperative rural cooperative banks in the country as on March 31,
2009, 313 were unlicenced. In accordance with the recommendations of the Committee of
India's Financial Sector Assessment (CFSA), the Reserve Bank decided that no unlicenced
cooperative bank will be allowed to function in the country after March 31, 2012. After this,
RBI and NABARD worked closely with the cooperative banks and licensed 272 of them, in
some cases by relaxing the licencing norms.
31. As on April 1, 2012, there still remained 41 cooperative banks which could not meet
even the relaxed licencing norms. In order to maintain the integrity of the cooperative system
and to protect public interest, the Reserve Bank imposed Directions on these 41 banks
prohibiting them from accepting fresh deposits. I must mention here that the Directions do
not imply any ban on the normal operations of the banks with the existing account holders.
While prohibiting these banks from accepting fresh deposits, the Reserve Bank has been
guided by the need to protect the interests of depositors and by larger public interest.
32. Also, a large number of Cooperative Societies at the bottom level i.e. 18553 PACS
(around 20 per cent of total) could not be covered under the revival package recommended
by the Vaidyanathan Committee- I (VC I)3 because of poor recovery performance. States
have to come out with a road map for reviving these PACS. The remaining eligible PACS
covered under VC-I have to work towards achieving full recapitalisation by bringing in their
own share towards recapitalisation.
33. The position of Urban Cooperative banks is relatively better as the process of
consolidation and resolution over the last few years has weeded out many of the financially
weak banks in a non-disruptive manner. As on date, only one UCB remains to be licenced.
Adopt technology for a level playing field
34. Technology has become a major factor in determining the essence of modern
banking efficiency. Cooperative banks are still far behind commercial banks and RRBs in
upgradation of technology. Cooperative banks must realise that banking in today's world
cannot be independent of technology, not so much because of competition from commercial
banks alone, but because that is what the modern customer - rural or urban - demands.
Cooperatives must, therefore, come up to speed in regard to technology.
Improve share capital and deposit safety
35. As I mentioned earlier, the critical issue for the future of cooperatives is to ensure
that members have a substantial financial stake in the cooperative. A number of initiatives
including increasing the face value of the membership fee or shares would be necessary to
make this happen.
36. Members today are hesitant to keep deposits even with their own PACS because of
concerns about the safety of their deposits. Deposits in PACS are not covered by DICGC,
and the deposit insurance schemes of states have remained only on paper. There is an
urgent need to rebuild customer faith and trust in cooperative institutions so that small
depositors do not vote with their feet and take business away from cooperatives.
Increase member participation
37. With the ever increasing number of small and marginal farmers and hence
increasing informal tenancy, developing aggregation models for financing, agronomic
practices, input supply, use of equipments, marketing and processing are immediately
required. While the Joint Liability Groups of farmers can serve as an intermediary step, the
long term solution is more intense engagement with members.
38. For increasing member participation in the affairs of the PACS, it is essential to
increase the number of points of contact between the members and the PACS. The most
effective contact can come only be through fruitful business between the two, and hence, the
product range offered by the PACS needs to expand significantly.
39. We need to work towards converting PACS into multi functional entities so that all
members automatically think of their PACS whenever they think about products and
services. Examples of PACS engaged in procurement, providing warehousing facilities,
stocking and providing other inputs including seeds and saplings, leasing out farm
equipments, becoming e-enabled common service centres providing land records and
information on weather, market prices, and extension advisories, and so on are now
available in some states. PACS also need to provide other financial products, especially
insurance, and enhance their fee based income.
Questions for the way forward
40. Having set out the agenda for repair and reform, let me now raise a few questions
which, I hope, will engage the attention of this Conference over the next two days.
Question 1: Are cooperatives doing enough for financial inclusion?
41. The basic philosophy and essence of cooperative credit structure is to ensure
financial inclusion. Financial exclusion, as we all know, is not confined only to the remote
parts of this country; it exists in urban centres as well. The significance of urban financial
inclusion also lies in the fact that financial inclusion of the urban poor, and particularly of
migrant labourers, provides a forward linkage to rural financial inclusion through the
remittance corridor. This question is directed particularly to cooperatives working in urban set
up. Are they doing enough for financial inclusion? Have they cared to open large enough
number of accounts of slum dwellers and migrant labourers?
Question 2: Can cooperatives improve the supply chain to ease inflationary pressure?
42. In developing economies where the supply chain management is generally weak,
the layering of middlemen oftentimes creates an artificial inflationary pressure. Can a more
proactive approach in developing sustainable agri-value chain through cooperatives help in
sustainably easing inflationary pressure?
Question 3: How to strengthen the democratic character of a cooperative?
43. Democracy and open membership are among the cardinal principles of cooperation.
However, a recent study conducted on urban cooperative banks by the College of
Agricultural Banking presents a disappointing picture of the democratic set up in these
institutions. The low attendance of members in general body meetings and their poor
participation in the election process raise questions about the democratic quotient. Are
governing bodies and associations working towards encouraging greater involvement of
members in cooperative governance? Should there be a separate institution similar to the
Election Commission to improve the democratic ethic of cooperatives?
44. A relevant issue is that there are several instances of cooperative institutions
becoming leader centric. They do well under some good leaders, but crumble when those
leaders leave. What is the "mantra" for institutionalizing leadership at the grass root level?
Question 4: Should cooperative banks diversify beyond basic banking?
45. There is an ongoing debate on whether cooperative banks should restrict
themselves to offering plain vanilla products, or whether they should also, like commercial
banks, diversify into offering exotic and complex products. In deciding on this, we should be
guided by the experience of the crisis. The main criticism against banks post-crisis has been
that they have mostly turned into becoming "casinos". Isn't there value then in cooperatives
restricting themselves to being "utility" banks?
Question 5: Should these be social audit of cooperatives?
46. While "cooperative" is a social phenomenon, "banking" is a commercial and
business proposition. Keeping in view these two conflicting dimensions of cooperative
banking, there is an argument in favour of evaluating cooperatives on non-financial
parameters alongside the financial parameters. Can there be a system of social audit which
world assess the performance in terms of social, environmental and community goals of the
organisation? If yes, what should be the appropriate institutional mechanism for this social
audit function?
Conclusion
47. Let me now conclude by summarizing what I have said. I argued that
notwithstanding stereotype views to the contrary, the cooperative ethic remains relevant
even today. Indeed, we have become even more aware of the value of a member driven,
grass root institution like the cooperative after witnessing the devastation caused by the
greed and excess of the financial sector that resulted in the global financial crisis of 2008/09.
Thereafter, I traced the Indian experience of cooperatives and conjectured whether the main
weakness of the cooperative structure in India is the fact that it grew on the basis of support
from a top down state policy rather than as a broad based bottom-up movement.
48. I then reflected on the several infirmities of the Indian cooperative sector, but argued
that despite these infirmities, cooperatives have played a vital role in furthering financial
inclusion. I then moved on to listing the main issues concerning the cooperative sector that
we must address in order to revitalize it. Finally, I raised five questions relating to the
cooperative sector on the way forward that must engage the attention of this Conference.
49. As I come to a close, I realize that I have been more cynical than I actually want to
be. Perhaps I should correct that. The cooperative ethic is unexceptionable. It has been and
can be a powerful instrumentality for enfranchising the poor and the less privileged. Indeed,
there are numerous instances from around the world, and from India too, of successful
cooperatives. Yet for a variety of reasons, both financial and governance related, the
credibility of cooperatives has got eroded, especially since cooperatives have come under
the spell of several infirmities, some of them chronic. Yet, it is possible to cure these
infirmities and revive the cooperative structure into health and vibrancy. Indeed this is not a
matter of choice, but an imperative if we are to achieve our collective aspiration for inclusive
growth. I hope this Conference will help us find a way forward in this regard.
My best wishes for the success of this Conference.