Cooperatives - The Flawed Gem of Indian Rural Finance

This MicroSave briefing note focuses on the urgent need to revitalize the cooperative network in India. The note states that:

• The rural ‘Cooperative Credit Structure (CCS) plays an important role in the Indian rural finance system.
• Together with the rural commercial bank branches and the Regional Rural Banks (RRBs), the cooperative system meets an average of 5,600 people per branch in India.

It then lists the following flaws of the network of cooperatives in India:

• The burden of directed credit and restrictive interest rates;
• Mismanagement, privileged leadership and corruption;
• Extensive interference from state governments;
• Full voting rights to borrowers and none to depositors;
• Problems in governance:
  • Divergence of interests between the management and members;
  • The tendency of borrowers to dominate the board;

The note presents the following recommendations that the “Union Task Force on Revival of Cooperative Credit Institutions” set out in 2005:

• Restore democratic management in the societies through free and fair elections;
• Reduce scope for government interference in their management;
• Rationalize staff and improve their professional ability;
• Create a climate conducive to prudent management of resources and efficient recovery of dues;
• Empower the “Reserve Bank of India (RBI)” to take action in the financial management of banks.

The note concludes by recommending that the government invest in capacity development to strengthen the governance and management so critical to the success of the cooperative network.