K Ramesha
Source: Business Standard
Source: Business Standard
The proposal to make rural credit cooperatives the business correspondents of commercial
banks will work only if the alliance is mutually beneficial.
The recent decision to use Primary Agricultural Cooperative Societies (PACs) to distribute
crop loans to farmers by commercial banks in Maharashtra and the approval given by the
Reserve Bank of India (RBI) and National Bank for Agriculture and Rural Development
(Nabard) are welcome steps in the present context in which Maharashtra State
Cooperative Bank has been superseded. This arrangement, however, has to be temporary
and efforts must be made to strengthen credit cooperatives at all levels.
For quite some time, there have been discussions on the role of cooperatives in furthering
financial inclusion, often suggesting field-level credit cooperatives and PACs to function as
Business Correspondents (BCs) of commercial banks. Surprisingly, this model is
considered beneficial to the PACs themselves. In a recently concluded conclave on financial
inclusion at Mumbai (the 26th Skoch Summit), I argued that the large-scale involvement
of PACs as BCs of commercial banks might prove detrimental to the PACs, depriving them
of their cooperative character and reducing them to “agents” of commercial banks. What
may be needed is an alliance between commercial banks and PACs that is mutually
beneficial. The alliance, in the long run, should strengthen the credit cooperative structure.
In a way, the alliance between banks and PACs should help the latter effectively address
problems such as poor financial health and weak recycling of funds. This sort of alliance
only can promote meaningful financial inclusion as also a diversified financial system
resulting in greater financial stability.
Although the performance of the Indian banking system has been commendable during the
last one and a half decade, large-scale financial exclusion has undoubtedly eclipsed the
otherwise good performance of the banking system. It is now an accepted fact that
financial inclusion, including the provision of credit at affordable cost, is a pre-requisite for
inclusive growth. Although financial sector policies have long been driven by the objective
of increasing financial inclusion, the goal of universal inclusion remains a distant dream.
Notwithstanding the poor performance of credit cooperatives, it must not be forgotten that
these credit cooperatives at the grassroots are functionally and ideologically best suited to
rural India. This apart, financial inclusion minus grassroots credit cooperatives is simply
unthinkable in the Indian context because of their sheer number and spread. The
magnitude of financial exclusion has gone up during the last decade, the decade that
witnessed a sharp fall in market share of rural credit cooperatives. One cannot remain
oblivious to the fact that the deteriorating market share of rural credit cooperatives is
closely linked to financial exclusion. Put it differently, the declining market share of
cooperatives has resulted in large-scale exclusion and, therefore, credit cooperatives must
be made active partners in promoting financial inclusion.
Everyone agrees and many argue that PACs numbering more than 100,000 should be used
as BCs by banks. What needs to be debated is: is it possible to see PACs as BCs and also
as grassroots credit cooperatives? The real challenge is to design an alliance in which
banks would be the beneficiaries of thousands of outlets for financial services in rural India
and PACs the gainers of financial inclusion in terms of the increased flow of funds and
associated benefits. The broad contours of such a model are:
PACs are allowed to act as BCs in its true sense — say, as “agents” for the mobilisation of
deposits. Though the reputation of the PACs as financial intermediaries capable of handling
public deposits is questionable, one can expect a fair degree of success in this regard as
PACs will be mobilising and maintaining accounts on behalf of commercial banks.
Depending on the success and capabilities of PACs, a portion of the deposits mobilised
may be retained by these cooperatives. To the extent of deposits retained, the PACs could
be given freedom in lending operations.
Insofar as the provision of credit, a critical component of financial inclusion, is concerned,
PACs will essentially perform the role of a BC, i.e., the credit risk is borne by the
commercial banks. However, commercial banks may have to strengthen the riskmanagement
capabilities of PACs to ensure that the deposits they retain are effectively
recycled on the one hand and these cooperatives are enabled to take credit decisions
independently, on the other.
At the district level, the lead bank in consultation with the District Central Cooperative
Banks (DCCBs) and the state government will have to take responsibility for identifying
PACs for the alliance. Nabard funds under this alliance, especially for crop loans, will have
to be channelled through the bank with which PACs are associated as a BC. DCCBs, which
are federal bodies at the district level, should extend business support as also financial
support to their member PACs from their own sources.
The approach outlined here may appear simplistic but it is pragmatic and must be seen
against the backdrop of a large number of financially-weak PACs with vast geographical
spread and large- scale financial exclusion. This arrangement speaks of the step-by-step
approach to strengthen PACs on the one hand and on the other, effective utilisation of
PACs for furthering financial inclusion. This arrangement also limits the default risk or risk
of non-payment of loans by borrowers to the amount lent by PACs, which is inclusive of
their own resources and the amount borrowed/deposits retained. A couple of experiments
in Maharashtra might be in order before replication in other parts of the country.
banks will work only if the alliance is mutually beneficial.
The recent decision to use Primary Agricultural Cooperative Societies (PACs) to distribute
crop loans to farmers by commercial banks in Maharashtra and the approval given by the
Reserve Bank of India (RBI) and National Bank for Agriculture and Rural Development
(Nabard) are welcome steps in the present context in which Maharashtra State
Cooperative Bank has been superseded. This arrangement, however, has to be temporary
and efforts must be made to strengthen credit cooperatives at all levels.
For quite some time, there have been discussions on the role of cooperatives in furthering
financial inclusion, often suggesting field-level credit cooperatives and PACs to function as
Business Correspondents (BCs) of commercial banks. Surprisingly, this model is
considered beneficial to the PACs themselves. In a recently concluded conclave on financial
inclusion at Mumbai (the 26th Skoch Summit), I argued that the large-scale involvement
of PACs as BCs of commercial banks might prove detrimental to the PACs, depriving them
of their cooperative character and reducing them to “agents” of commercial banks. What
may be needed is an alliance between commercial banks and PACs that is mutually
beneficial. The alliance, in the long run, should strengthen the credit cooperative structure.
In a way, the alliance between banks and PACs should help the latter effectively address
problems such as poor financial health and weak recycling of funds. This sort of alliance
only can promote meaningful financial inclusion as also a diversified financial system
resulting in greater financial stability.
Although the performance of the Indian banking system has been commendable during the
last one and a half decade, large-scale financial exclusion has undoubtedly eclipsed the
otherwise good performance of the banking system. It is now an accepted fact that
financial inclusion, including the provision of credit at affordable cost, is a pre-requisite for
inclusive growth. Although financial sector policies have long been driven by the objective
of increasing financial inclusion, the goal of universal inclusion remains a distant dream.
Notwithstanding the poor performance of credit cooperatives, it must not be forgotten that
these credit cooperatives at the grassroots are functionally and ideologically best suited to
rural India. This apart, financial inclusion minus grassroots credit cooperatives is simply
unthinkable in the Indian context because of their sheer number and spread. The
magnitude of financial exclusion has gone up during the last decade, the decade that
witnessed a sharp fall in market share of rural credit cooperatives. One cannot remain
oblivious to the fact that the deteriorating market share of rural credit cooperatives is
closely linked to financial exclusion. Put it differently, the declining market share of
cooperatives has resulted in large-scale exclusion and, therefore, credit cooperatives must
be made active partners in promoting financial inclusion.
Everyone agrees and many argue that PACs numbering more than 100,000 should be used
as BCs by banks. What needs to be debated is: is it possible to see PACs as BCs and also
as grassroots credit cooperatives? The real challenge is to design an alliance in which
banks would be the beneficiaries of thousands of outlets for financial services in rural India
and PACs the gainers of financial inclusion in terms of the increased flow of funds and
associated benefits. The broad contours of such a model are:
PACs are allowed to act as BCs in its true sense — say, as “agents” for the mobilisation of
deposits. Though the reputation of the PACs as financial intermediaries capable of handling
public deposits is questionable, one can expect a fair degree of success in this regard as
PACs will be mobilising and maintaining accounts on behalf of commercial banks.
Depending on the success and capabilities of PACs, a portion of the deposits mobilised
may be retained by these cooperatives. To the extent of deposits retained, the PACs could
be given freedom in lending operations.
Insofar as the provision of credit, a critical component of financial inclusion, is concerned,
PACs will essentially perform the role of a BC, i.e., the credit risk is borne by the
commercial banks. However, commercial banks may have to strengthen the riskmanagement
capabilities of PACs to ensure that the deposits they retain are effectively
recycled on the one hand and these cooperatives are enabled to take credit decisions
independently, on the other.
At the district level, the lead bank in consultation with the District Central Cooperative
Banks (DCCBs) and the state government will have to take responsibility for identifying
PACs for the alliance. Nabard funds under this alliance, especially for crop loans, will have
to be channelled through the bank with which PACs are associated as a BC. DCCBs, which
are federal bodies at the district level, should extend business support as also financial
support to their member PACs from their own sources.
The approach outlined here may appear simplistic but it is pragmatic and must be seen
against the backdrop of a large number of financially-weak PACs with vast geographical
spread and large- scale financial exclusion. This arrangement speaks of the step-by-step
approach to strengthen PACs on the one hand and on the other, effective utilisation of
PACs for furthering financial inclusion. This arrangement also limits the default risk or risk
of non-payment of loans by borrowers to the amount lent by PACs, which is inclusive of
their own resources and the amount borrowed/deposits retained. A couple of experiments
in Maharashtra might be in order before replication in other parts of the country.
