One of the highlights of the recent Union Cabinet reshuffle is the creation of a separate Ministry of Co-operation under the charge of the Union Home Minister. Earlier, ‘co-operation’ was one of the ‘Divisions’ under the Ministry of Agriculture.

With the latest move, it appears that the government has finally realised that “co-operation has failed”, and is now committed to prove that “it will succeed.” Earlier governments realised the failure of the co-operative movement but did not initiate ground-breaking measures needed to revitalise them.

So far, comments on the move revolve around political dimensions: that ‘cooperation’ is a ‘State’ subject and by setting up a Central ministry, the Centre intends to encroach upon the States’ independence. However, there are economic compulsions which make the move relevant.

Though India’s cooperative movement has a long history, its financial and governance aspects, got tarnished due to various reasons which have been well-documented by several committees starting from the pre-Independence era (e.g., Mac Lagan Committee - 1914) to recent times (e.g., Gandhi Committee - 2015).

The co-operatives in India are of two types: rural and urban. There are 97,006 rural co-operative banks (March-end 2019) and 1,539 Urban Cooperative Banks (UCBs) (March-end 2020). Rural co-operatives accounted for 65 per cent of the total asset size of all co-operatives. Thus, the focus of the proposed ministry will be on the welfare of the agriculture sector. Cooperatives have a big role to play in the government’s objective of doubling farmers’ income by 2022.

Nearly 72 per cent of the UCBs are in Maharashtra, Gujarat, Karnataka and Tamil Nadu. Such geographic contiguity exacerbates the ‘concentration’ risk in the case of any financial problems, particularly during pandemics. The UCBs are repositories of savings by millions of low- to middle-income group households. At March-end 2020, the UCBs had total deposits of over ₹5 lakh crore.

Ironically, several of these banks are fragile, thereby jeopardising depositors’ money.

Analysing the malaise

Various government/RBI committees have attributed this to dual control, lack of professionalism, small size and low capital, legal hassles and last but not least, excessive politicisation. Even before establishing the Ministry of Co-operation, the government had taken a bold step to discipline the sector by amending the Banking Regulation Act in 2020. The amendments empower RBI to act swiftly to resolve a troubled bank through various means so that it doesn’t fail, and its depositors’ interests are fully protected.

Unfortunately, the government’s intention has been misinterpreted by some who don’t favour it. Therefore, the amended Act has to be ‘pushed’ through seamlessly. Fortunately, the recent invalidation of the 97th Amendment of the Constitution (2011) will not affect RBI’s regulation of large cooperative banks. The Ministry will buttress the unified regulation on which RBI has already started working.

Today, the vulnerable co-operative sector needs consolidation, professionalism, capital, single regulation and supervision, and minimal external interference. The urgency for these will be felt more in the post-Covid period when the sector, like its commercial counterpart, emerges weaker. For these, strong ‘central’ direction will be essential. The question is not who controls the cooperatives; if the cooperatives can manage themselves efficiently, there will be increasing freedom for them and vice versa.

As Kofi Annan said, “Founded on the principles of private initiative, entrepreneurship and self-employment, underpinned by the values of democracy, equality and solidarity, the co-operative movement can help pave the way to a more just and inclusive economic order.”

Mehra is former Deputy Managing Director and Das is former senior economist, SBI

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