In India, government control has only increased, in violation of a core cooperative principle of political neutrality.
In 1954 the All India Rural Credit Survey Committee wrote, ‘Cooperation has failed, but cooperation must succeed.’ These words belonged to Venkatappiya, the first executive director of the Reserve Bank of India and a member of the committee. He later became the Deputy Governor and Chairman of the State Bank of India before heading the Agricultural Credit Review Committee in 1969.
The decision comes five decades after the first cooperative law of 1904. Lord Wenlock, the governor of the Madras Presidency, had seriously tried to imitate European cooperatives in India. Madras was ideal for this experiment as it had similar institutions in its funds. Nicholson, appointed in 1892 by Wenlock to report on the possibility of their implementation, summarized his 1895 report in two words: ‘Find Raiffeisen’.
Pioneers in Europe
Nicholson was referring to Friedrich Raiffeisen, who, together with compatriot Schultz-Delitzsch in Germany and Luzzatti of Italy, pioneered cooperatives in Europe. Raiffeisen based them on the principles of self-help, self-governance and self-responsibility. Known for their reliability and resilience against financial crises, most were known as Riefenbanks, spreading to other parts of Europe and the Americas. Rabobank, a Dutch cooperative whose first two letters came from Raiffeisen, was the last triple A-rated bank.
Nicholson wrote that ‘the future of rural credit lies with those who, by virtue of being the people, live among the people, and yet are above the people with their intelligence, prudence and energy’. He did not use Raiffeisen as a sign of any individual or system, but exemplified so well the zeal, energy, patience and constant devotion in that great reformer, and the spirit of cooperation, frugality, self and mutual help. Used so well. Developed in the above and similar systems…’
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Gilbert Slater, having joined the University of Madras in 1915 as the first professor of economics, went in search of Raiffeisen which was in Nicholson’s province. In the office of the Registrar of Co-operative Societies (RCS), he found that the clerks were sleeping, the turban was placed next to the ink pots, and had no clue about the whereabouts of their owner, whose expertise was in the Tamil panchang.
His successor, FR Hemingway, had better days with the ICS, appointing Dr. John Mathai as Officer on Special Duty. Mathai, the first Indian to receive a doctorate in economics from the London School of Economics, worked for a year in Ireland with collaboration specialist Sir Horace Plunkett. He later became Slater’s aide and India’s finance minister.
Sir Denzil Ibbetson, while introducing the Co-operative Societies Bill on 23 October 1903, said that the bill sought to ‘make small and ordinary credit societies for small and ordinary people who have simple needs and need only small sums of money’. Is’. He said that ‘cooperatives should be built from below, not from above’. Plunkett, in the preface to Eleanor Hough Cooperative Movement in India (1932) remarked that what India had was not a movement but a policy. It was created by ‘central government resolutions’ unlike Europe.
Mathai wrote in 1925 that over the years the challenge was to loosen the government’s grip on cooperation. But, in violation of the basic cooperative principle of political neutrality, government control has only increased. It shows the collective failure of the political class.
Read also | Limitations of Cooperation: On Reforms in the Cooperative Sector
After independence, cooperatives became an instrument of planning and state action. Not surprisingly, the most successful Indian co-operatives such as the Gujarat Cooperative Milk Marketing Federation Limited (GCMMF)/Amul, where Mathai’s nephew became Varghese Kurian Raiffeisen, Indian Farmers Fertilizer Cooperative Limited (IFFCO) and Krishak Bharati Cooperative Limited (KRIBHCO), controlled by the government are out of. Globally, seven of the top 10 cooperatives by asset size are from the financial sector. The Indian financial sector is nowhere in the picture of asset size. Some break into the top 300 on a turnover/GDP per capita basis, aided by a lower denominator.
When a co-operative bank grows up, it is a challenge to maintain its co-operative. Co-operatives have also become avenues for bypassing regulatory arbitration, lending and anti-money laundering regulations. Plunkett and others suffered from top-down quality to the societies investigating cooperative banking. Recent initiatives such as an umbrella organization for urban cooperatives and a new cooperative ministry at the Center threaten to pursue this approach in the absence of safeguards.
A check on RCS
First, the powers of the RCS need to be reduced. A British Indian innovation, it failed to live up to its original role of a facilitator: a friend, philosopher, and guide to cooperatives. In almost all states, the RCS has become an instrument of oversight and dominance, enforcing uniform bylaws, and amending them when individual societies do not line up.
The early pieces of legislation gave extensive powers to the RCS as the laws were in the experimental stage. In addition, the laws were simple and flexible so that they covered the area stretching from present-day Pakistan to Myanmar. RCS was empowered to give relaxation keeping in view the local conditions. However, the situation continued even after the Montagu-Chelmsford Reforms co-operated under the provinces in 1919. RCS continued to dominate even after independence. Some states also provide for the takeover of the entire board of cooperative boards. There is a need to transfer work from RCS to cooperatives – as in Singapore.
Second, the rural-urban dichotomy in the regulatory practice of cooperatives is typical and chronic. It perpetuates a centuries-old division based on the nature of operations and the size of the population. Such differences are insignificant when regulation is based on the cooperative nature of organizations.
Third, regulation and supervision of co-operative banks should be shifted to a new body from the Reserve Bank of India (RBI) for urban banks and the National Bank for Agriculture and Rural Development (NABARD) for rural banks. The arguments for combining supervisory powers with the RBI do not bode well for cooperative institutions. In addition, it would ensure a fresh look at regulation of these institutions, on which stringent regulations such as the Basel Committee are not designed to impose. As far as NABARD is concerned, the burden of oversight of rural co-operative societies (and regional rural banks), apart from being a waste of resources, is a distraction from its original mandate.
Netherlands experience
Fourth, lessons from the Netherlands, where co-operative banks attribute their success to a fragmented market, are relevant. In India, the adoption of the multi-agency approach, especially after bank nationalisation, has affected the efficiency of both commercial and co-operative banks. The commercial bank-co-operative sector relationship at various levels may alternatively provide better synergies.
Venkatappaiah’s words still hold true. So do the words of Nicholson nearly 13 decades after his report: “Find Raiffeisen.”
Yes. Sreekumar is a former central banker
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