Lax monitoring breeds 'anarchism' in cooperatives

Kathmandu, Sept. 3

Nine years ago in 2013, Oriental Cooperative embezzled the depositors' money to the tune of Rs. 6.86 billion. Approximately, Rs. 11.41 billion fund deposited at the organisation was at risk and its chairman, Sudhir Basnet, had used t 60 per cent of the money by himself. He had invested the money in various housing and real estate projects. Likewise, Guna Saving and Credit Cooperative was also fell into problem then.

Responding to the public outcry, the government in October 2013 had formed a commission to investigate the problematic cooperative organisations dealing in savings and credits. By May 2014, the commission led by Gauri Bahadur Karki, former Chairman of the Special Court, received 22,170 complaints from 12,962 individuals against 162 cooperatives. The total claim was Rs. 10.08 billion including Rs. 2.40 billion interests on the deposits.

After nine years in July 2022, chairman of Gautam Shree Multipurpose Cooperative Organisation, Ram Bahadur Gautam, made off without returning the savings of the depositors. Gautam Shree has about 5,000 customers and has a liability to return Rs. 7 billion or so to the depositors. Panic heightened after Everest Bank sealed the shops run by the cooperative and padlocked its office after the latter failed to repay the loan obtained by the bank.

The commission had found 153 cooperatives problematic but the Ministry of Land Management, Cooperatives and Poverty Alleviation (MoLMCPA) has announced only 12 of them as 'problematic'. Commission had identified the 'problematic' cooperatives five years ago so recent cases of Gautam Shree and Civil Savings and Credit Cooperative are not included on the list. The Auditor General had mentioned this fact in its report as well.

Former Chairman of Civil SACOS, Ichchha Raj Tamang, who is a lawmaker and renowned contractor, had been found using the cooperative for money laundering. His wife Srijana Shakya had been found embezzling Rs. 1.3 billion while their daughter Pratiksha and then Chairman Keshav Lal Shrestha had also swindled a large amount of money from the organisation, said the DoC. The Department of Money Laundering Investigation has filed a case against Tamangs and Shrestha.

The commission in 2014 had concluded that problems in the saving and credit cooperatives (SACOS) were the result of non-adherence to the values of cooperative, absence of policy maker and regulatory body, and lack of proper monitoring. But the situation has not changed in the past eight years.

Meanwhile, the country adopted a federal structure and the Cooperatives Act, 2017 devolved regulation to the subnational government, without creating a robust monitoring and operation mechanism. While a small number of large cooperatives are under the scrutiny of the Department of Cooperatives (DoC) at the MoLMCPA, a massive number of them are operating under the local governments.

According to DoC, by December 2020, there were 29,886 cooperative organisations in Nepal. Of them, only 125 (0.41 per cent) are under the federal government, 6,003 (20.08 per cent) under the provincial governments, and 23,759 (79.49 per cent) under the local governments.

 

Problems piled up

So, in less than a decade, the problems of the cooperatives have not been resolved, rather they accumulated.

Registrar of the DoC, Rudra Prasad Pandit, said that in principle cooperatives should be self-regulated by the members of the organisation but it is seldom practiced by the large cooperatives. Cooperatives campaigners say that 'excessive greed' of the operators and lack of scrutiny by the members had resulted in the growth of problematic cooperative organisations. According to them, there is a kind of 'anarchism' in the sector since many don't follow the policy, method and system.

Operators of the cooperatives don't follow the collective decision-making system and haphazardly invest the money in their own projects or their 'near ones'.

"In such a scenario, cooperatives with the liabilities of billions of rupees have gone under the local governments that have neither the qualified human resource nor infrastructure and technology to monitor them," said Pandit.

There were 37 divisional cooperative office across the country before the new law came into existence and there was a kind of cooperation which is lacking in the new structure. Although the new law has a provision to monitor the large cooperatives by the Nepal Rastra Bank (NRB), it has not happened.

The central bank has not shown interest in the monitoring of the cooperatives despite multiple calls by the stakeholders, including the DoC. Pandit also thinks that the provision to monitor and supervise the cooperatives above a certain limit of capital is pragmatic.

Member of the Problematic Cooperative Management Committee, D. B. Basnet, said that the committee has been trying to raise the money to return to the depositors. But most of the cooperative operators have long absconded and evading the legal trials.

"We are seeking help from the Crime Investigation Bureau (CIB) of the Nepal Police. But it is difficult to find the directors fleeing the law, and their properties," he said. The Cooperatives Act does not have a provision or model to raise the money embezzled by the directors of a cooperative organisation.

 

Few problematic cooperatives

Cooperative Organisation	Savings Rs.
Oriental Cooperative	6.86 billion
Standard SACOS	533.6 million
Pacific SACOS	308.6 million
Prabhu SACOS	218.3 million
Societal SACOS	150 million
Consumer SACOS	101.3 million
Kohinoor Hill SACOS	68.6 million
Standard Multipurpose Coop	67.4 million
Kuber SACOS	43.8 million
Chartered SACOS	31.4 million
Vegas SACOS	21.2 million

Source: Problematic Cooperative Management Committee

 

Money stuck in real estate

The crisis in cooperatives began to erupt with the slow-down in the real estate and housing business because a large amount of money was channelised to these businesses. The problems were further aggravated by the new land-use policy that barred the plotting of land, liquidity shortage in the financial system and COVID-19 pandemic.

Director of National Cooperatives Federation Nepal, Sagar Dhakal, also maintained that the economic slow-down and liquidity were having their toll on the cooperatives, at the same time increased interest rates of banks attracted more money to them creating liquidity crunch in cooperatives.

"However, the main reason of the crisis is the entry of the 'greedy' people who wanted to earn easy money on  a fast-track," he said. Those people channelised a huge fund in purchasing land, plotting it, building houses and selling them.

 

No monitoring, supervision

Touted as the 'third pillar of Nepali economy' and mentioned so in the constitution of the country despite its small contribution to the economic growth, the cooperatives have mobilised Rs. 477.96 billion in deposits and Rs. 426.26 billion in loans.

"Cooperatives are the custodians of a large amount of money but they are  running without monitoring and supervision. We have  repeatedly suggested the government to address the issue but to no avail," said Basnet.

According to him, it’s a governance issue. But both the government and the cooperatives have failed to assimilate its importance.

Dhakal said that the current crisis has eroded the confidence in cooperative which will affect their business and development campaign. He suggested for the application of banking norms in the cooperatives sector along with robust monitoring mechanism.

"The government should punish the culprits but should not shut down the cooperatives as it may result in other debtors not repaying the loans," he said.

Many experts also suggested for a separate law for SACOS and enhancing members' control in decision making.

If a cooperative becomes 'problematic, then a new management committee should be formed, properties of the directors should be frozen, and assets of the organisation and directors should be liquidated to raise money to return to the depositors’, suggested Dhakal.

 

Controlling the entry

Pandit suggested the controlling of haphazard registration of cooperatives while Basnet said that SACOS registration should be allowed in the rural municipalities while the cooperatives in urban areas should be pushed for a forceful 'merger'.

The DoC also wants credit information bureau, credit tribunal and periodic reporting mechanism for the cooperatives.

According to Basnet, they should have two separate licenses to run cooperatives – one for the registration and one for the commencement of the financial transaction, the same in practice for the banks and financial institutions. "Licenses for the financial transaction should not be given to those organisations that have poor management system," he said.

He suggested that the SACOS should be registered at the NRB and should be supervised and monitored by the central bank. However, the NRB wants a dedicated policy before it expands its jurisdiction to the cooperatives.

 

Two-tier regulation

The government has long been paying a lip service to a provision titled 'two-tier regulation' for the cooperatives. However, the provision announced in the budget of the current fiscal year 2022/23 is repeated for at least five times in the policy documents but could not be materialised.

Two-tier regulation envisions a dedicated department under the NRB to supervise and monitor the sector.

Basnet maintains that if such structure is created, most of the problems in cooperatives sector would be resolved in about 1.5 years. The cooperatives would be forced to create scientific ledger of their transaction, adopt the modern technology and it would be easy to punish those who try to cheat their depositors.

But indifference of the government and political leaders to this mechanism is worrisome. "We have been demanding the two-tier provisions for years but no ministers or leaders had paid attention to it," said Basnet.

Monetary Policy of 2022/23 has a provision for the necessary facilitation for the establishment of the second-tier regulatory institution (STI), as stated in the budget for 2022/23, for effective regulation, inspection, and supervision of savings and loan cooperatives and non-governmental organizations that are outside the supervisory scope of the central bank.

Necessary support is pledged to make the regulation, inspection, and supervision system of saving and credit cooperatives effective.

Earlier, through the Monetary Policy of 2021/22, the NRB had announced that essential policy coordination will be made and technical assistance will be provided to the regulatory bodies of savings and credit cooperative institutions for enhancing their regulatory and supervisory capacity. However, no concrete achievements were noticed although the central bank has maintained that such assistance was provided regularly on request. 

Published in The Rising Nepal daily on 2 September 2022.