‘Cooperation has failed, but cooperation must succeed,’ wrote the All India Rural Credit Survey Committee in 1954. These were the words of Venkatappiah, first Executive Director of Reserve Bank of India and member of the Committee. He later became Deputy Governor, and Chairman of State Bank of India, before chairing the Agricultural Credit Review Committee in 1969.
This verdict came five decades after the first cooperative legislation of 1904. The Governor of the Madras Presidency, Lord Wenlock, was the first to seriously attempt replicating European cooperatives in India. Madras was ideal for this experimentation as it had similar institutions in its Nidhis. Nicholson, appointed by Wenlock in 1892 to report on the possibility of their implementation, summed up his 1895 report in two words: ‘Find Raiffeisen’.
Pioneers in Europe
Nicholson was referring to Friedrich Raiffeisen, who along with compatriot Schulze-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 trustworthiness and resilience against financial crises, most were known as Raiffeisenbanks, spreading to other parts of Europe and America. Rabobank, the Dutch cooperative whose first two letters come from Raiffeisen, was the last triple A-rated bank.
Nicholson wrote that the ‘future of rural credit lies with those who being of the people, live among the people, and yet by their intelligence, prescience and energy, are above the people’. He used Raiffeisen ‘not as indicative of a particular person or system, but of the zeal, energy, patience and continuous devotion so thoroughly exemplified in that great reformer, and of the spirit of co-operation, thrift, self and mutual help so thoroughly developed in the above and similar systems...’
The story in India
Gilbert Slater, after joining Madras University in 1915 as its first Professor of Economics, went looking for the Raiffeisen that Nicholson’s province had. At the office of the Registrar of Cooperative Societies (RCS), he found the clerks sleeping, turbans placed next to inkpots, and no clue about the whereabouts of their boss, whose expertise was in the Tamil almanac.
Better days came with his successor, F.R. Hemingway, ICS, who brought in Dr. John Matthai as Officer on Special Duty. The first Indian with a doctorate in Economics from the London School of Economics, Matthai worked for a year in Ireland with Sir Horace Plunkett, an expert in cooperation. He later became Slater’s colleague, and India’s Finance Minister.
Sir Denzil Ibbetson, moving the Cooperative Societies Bill on October 23, 1903, had said that the Bill sought to create ‘small and simple credit societies for small and simple folk with simple needs and requiring small sums only’. He added that ‘co-operation must be built up from the bottom, and not from the top’. Plunkett, in his foreword to Eleanor Hough’s The Cooperative Movement in India (1932), commented that what India had was not a movement, but a policy. It was ‘created by ‘resolutions of the Central Government’ unlike Europe.
Matthai wrote in 1925 that the challenge was to loosen government grip on cooperation over the years. But, government control has only increased, violating a core cooperative principle of political neutrality. This reflects a collective failure of the political class.
Also read | Limits of cooperation: On reforms in cooperative sector
After Independence, cooperative institutions became an instrument of planning and state action. Not surprisingly, the most successful Indian cooperatives such as the Gujarat Cooperative Milk Marketing Federation Ltd (GCMMF)/Amul, where Matthai’s nephew, Verghese Kurien, became a Raiffeisen, Indian Farmers Fertiliser Cooperative Limited (IFFCO) and Krishak Bharati Cooperative Limited (KRIBHCO), are outside government control. Globally, seven of the top 10 cooperatives by asset size are from the financial sector. The Indian financial sector is nowhere in the picture going by asset size. A few make it in the top 300 by turnover/GDP per capita, aided by a low denominator.
When a cooperative bank scales up, maintaining its cooperativeness is a challenge. Cooperatives have also become avenues for regulatory arbitrage, circumventing lending and anti-money laundering regulations. The committees which examined cooperative banking suffered from the top-down quality that Plunkett and others frowned upon. Recent initiatives such as an umbrella organisation for urban cooperatives and a new Ministry of Cooperation at the Centre threaten to further this approach in the absence of safeguards.
A check on RCS
First, the powers of the RCS need to be scaled back. A British Indian innovation, it failed to stick to its original role of a facilitator: a friend, philosopher, and guide to cooperative societies. In almost all States, the RCS has become an instrument of inspection and domination, one which imposes uniform by-laws, and amends them when individual societies do not fall in line.
Early pieces of legislation gave wide powers to the RCS as the laws were in an experimental stage. Moreover, the laws were simple and elastic so that they could cater to a region extending from present-day Pakistan to Myanmar. The RCS was empowered to grant exemptions considering local conditions. But, the position continued even after the Montagu-Chelmsford Reforms placed cooperation under the provinces in 1919. The RCS continued to hold sway after Independence. Some States even provide for across-the-board takeover of cooperative boards. There is a need to transfer work from the RCS to cooperative federations — as in Singapore.
Second, the rural-urban dichotomy in the regulatory treatment of cooperatives is specious and outdated. It perpetuates age-old divisions based on the nature of operations and population size. Such differences are immaterial when regulation is to be based on the cooperative nature of organisations.
Third, the regulation and the supervision of cooperative banks should move 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 hold good for cooperative institutions. Moreover, it will ensure a fresh look at the regulation of these institutions to which stringent regulations like that of the Basel Committee are not designed to apply. As for NABARD, the burden of inspecting rural cooperatives (and regional rural banks) is a distraction from its core mandate, apart from being a drain on resources.
The Netherlands experience
Fourth, lessons from the Netherlands, where cooperative banks owe their success to a segmented market, are pertinent. In India, adopting a multi-agency approach, especially after bank nationalisation, has affected the efficiency of both commercial and cooperative banks. Commercial bank-cooperative sector linkages at various levels could alternatively provide better synergies.
Venkatappaiah’s words still ring true. So do the words of Nicholson, nearly 13 decades after his report: “Find Raiffeisen.”
G. Sreekumar is a former central banker
