Article S6.5 Research on Performance of Credit Cooperatives Seminar Leader: Biswa Swarup Misra Faculty Member, XIMB, India biswa[at]ximb.ac.in As an integral part of the multi-agency framework for credit delivery, cooperatives were institutionalised in India through the enactment of the Cooperative Credit Societies Act (1904). Due to this old and unique institutional framework, the cooperative penetration in rural India has been quite high. The short-term cooperative credit structure in India consists of the state cooperative banks at the apex level, district central cooperative banks at the middle level, and about 106,000 Primary Agricultural Credit Societies (PACS) at the base level. Farmer Services Societies (FSS), Service Cooperative Societies (SCSs), and Large-sized Adivasi Multi-Purpose Societies (LAMPS) are clubbed together with the PACS at the base level. The focus of Misra’s research was on the PACS. With a staggering 106,000 outlets and overwhelming membership of more than 120 million, the base-level cooperatives have about 50 per cent more number of accounts than all the commercial banks and the regional rural banks in India put together. The base-level cooperatives exceed all other financial institutions in their ability to reach small and marginal farmers. However, the precarious financial health of these cooperatives undermines all these inspiring facts and raises serious concerns regarding their viability. Misra’s research aimed at identifying the factors which may have led to the precarious financial condition of the PACS. Literature available on this topic indicates that, with the passage of time, the very principles of cooperation may have got compromised, partly due to external factors, which includes government interference, and partly due to their own internal dynamics. The burgeoning but rather rabid expansion of this seemingly morbid institution was studied over two time-periods--the pre-independence phase (pre-1947) and the post-independence phase (post-1947). The study employed both the qualitative and quantitative methods. There have been many research studies and committee reports to analyse the process of weakening of the cooperative structure in India. Committees have been set up both in the pre-independence and post-independence periods. Notably among them are Sir Edward Mac Lagan Committee (1914), Agricultural Credit Review Committee (1989), Capoor Committee (2000), and the latest, Vaidyanathan Committee (2004). However, the recommendations of these committees and the legislative initiatives launched by the government on the basis of those recommendations have failed to improve the financial condition of the cooperatives. The failure can be attributed, partly to the gaps between the recommendations and their actual implementation, and partly to the inherent flaws in the reports. Misra’s study brings out the missing elements in the earlier research on cooperatives, such as appropriate membership size for a cooperative and the peer pressure which the members exert on each other for repayment of loans. Analysing the factors contributing to weakening of cooperative sector, Misra emphasised that implementation of the recommendations of the All India Rural Credit Survey (AIRCS, 1952) may have been primarily responsible for the cooperative debacle. The AIRCS recommended a strategy of government partnership with the cooperatives in order to strengthen the latter’s capital base and to accelerate the pace of rural credit disbursement. However, instead of facilitating the growth of cooperatives into independent and self-sustaining systems, the policy framework emasculated them by institutionalising government intervention in cooperative management. This was corroborated by analysing the time-series data in the post-independence period to study the progress of PACS in terms of their numbers, members, owned funds, deposits, borrowings, working capital, loans advanced, loans outstanding, overdue, average membership, and the proportion of borrowing members. The secondary data for the period from 1990-1991 to 2004-2005 were collected from the National Federation of State Cooperative Banks (NAFSCOB), and for the period from 1951 to1990 were taken from INDIASTAT and NAFSCOB. The study involved a search for the ideal performance indicator for a cooperative. According to Misra, an appropriate indicator of cooperative performance goes beyond profitability. This is because, the performance of a cooperative should also be judged by its ability to inculcate the principle of cooperation among its members. This ability, when present, may translate into long-term viability of the cooperative. Accordingly, both profitability and viability were considered as two possible indicators of cooperative performance. However, analysis of the data showed a lack of correspondence between profitable and viable PACS in most states of India. It may be erroneous to come to any conclusion on this basis. First, the norms for viability have been changing over the years, on the basis of recommendations of various committees. Second, profitability and viability may not be correlated in the short-run, but perhaps correlated with a time lag. To go forward in his study, Misra considered recovery performance of the PACS as a possible indicator of their financial performance. Recovery performance reflects two important capacities: (a) capacity to recycle the funds and (b) capacity to inculcate the principle of cooperation among the members. The study made an attempt to identify the factors which contribute to the financial health of the PACS. It covered the period from1997 to 2005, using data on 19 states. The following questions were sought to be answered: (a) Whether the government’s involvement has done more harm than good for the cooperatives? (b) Whether a high proportion of non-borrowing members slackens accountability in the cooperative structure and contributes to their financial deterioration? (c) What are the impacts of membership size and the mix of loan portfolio on the performance of the PACS? The following statistical model was used: Recoveryi,t = C + η1 AVGMEMi,t + η2 GOVCAPi,t + η3 DEPTOBORi,t + η4 LOAGRIi,t + η5 GSDPi,t + εi,t Where η1, η2, η3, η4, and η5 are parameters to be estimated AVGMEMi,t is the average members per society GOVCAPi,t is the share of government capital as a proportion of working capital DEPTOBORi,t is the deposits of PACS as a proportion of its borrowings LOAGRIi,t is nonagricultural loans as a proportion of agricultural loans GSDPi,t is the growth in state domestic product εi,t is the error term The results of the study indicate that the government contribution to the share capital of the cooperatives adversely affects the recovery performance. Instead of behaving diligently, members perceive government’s involvement as some sort of guarantee against bankruptcy. Also, larger membership size was found to be detrimental to recovery performance. It was further established that a higher proportion of non-borrowing members adversely affected the recovery performance. It was perhaps because of the fact that non-borrowing depositors do not have adequate representation in the functioning of a PACS. There was some discussion on the limitations of framing cooperative performance as solely an economic issue. It was mentioned that viability is also studied outside economics. The field of organisational cybernetics considers viability as a system-level property that arises from the specific organisation of a system. The property of viability is defined as the ability of a system to maintain a separate identity within a range of environments. The viable system model (VSM) developed by the cybernetician, Stafford Beer, represents the minimum organisation necessary for such system-level viability. It seems the base-level cooperatives would fail to match the minimum organisation prescribed in the VSM. Reported by Biswajit Pal, with inputs from Biswa Swarup Misra and D. P. Dash. [March 11, 2009] Copyleft Xavier Institute of Management, Xavier Square, Bhubaneswar 751013, India Research World (ISSN 0974-2379) http://www1.ximb.ac.in/RW.nsf/pages/Home |
