The government has just introduced a directive that aims to keep tabs on members and transactions of financial cooperative units. This is a commendable step taken by the Department of Cooperatives, the regulator of the cooperative sector, as it will protect the interests of hundreds of thousands of people who have parked their hard-earned money in multipurpose and credit and savings cooperatives. But only introducing the law is a job half done.  The focus should now be on the enforcement of the directive, as financial cooperative units have found themselves in deep water in the past due to the lethargy shown by the regulator to effectively implement available laws.

Since the establishment of the first cooperative in the 1950s, the sector has grown by leaps and bounds, with the number of these institutions standing at over 34,000 today. Some of these cooperatives are trying to meet their core objectives of uplifting the living standard of people and transforming lives. Take the example of cooperatives working in the agricultural sector, which are bringing together farmers to form groups. This is helping farmers share experiences, pool funds to build infrastructure such as cold storage facilities, and gain market access. These measures are raising the bargaining power of farmers by helping them sell produce at prices they demand rather than those fixed by intermediaries. This is noteworthy. But a majority of the cooperatives are operating like banks; and since the rules of the banking sector do not apply to them, many are freewheeling, putting the public’s money at risk. It is these cooperatives that are giving a bad name to the entire cooperative sector.

In 2013, when financial cooperative units faced a crisis, many were found to be extending loans to relatives, friends, and near and dear ones at zero percent interest, that too without the backing of collateral. Many institutions were found to have approved loans through verbal instructions. These institutions also did not have proper credit disbursement and deposit collection policies.

A report prepared at that time by a high-level government commission had found that almost 13,000 depositors of 162 cooperative units risked losing Rs10 billion because of malpractices.

What was shocking at that time was that the regulator did not even bother to see whether financial cooperative units were abiding by basic rules such as the one that bars these units from mobilising deposits in excess of 10 times the paid-up capital. This should not happen again.

The new directive has given a clear-cut deadline to cooperatives to update information on members and provide other information through an Integrated Management Information System, which will help the regulator conduct off-site inspections. The Department of Cooperatives should ensure that no cooperative misses the deadline.