Thousands of cooperative-victims staged protests in various parts of the country demanding recovery of their deposits embezzled by cooperative operators. Hundreds of such depositors came to Kathmandu and staged capital-centric protests. The government recently signed an agreement with them, promising to solve their problems at the earliest. What are their major grievances? What are the larger issues of the sector? And how can this growing problem be managed? The Post’s Thira Lal Bhusal sat down with Kashi Raj Dahal, chair of the Crisis-ridden Cooperatives Management Committee, a government agency. He is also a former chair of the Administrative Court. Excerpts:

The problems with cooperatives have long been evident. So why was the crisis in the sector allowed to escalate?

Basically, the cooperatives are run for economic, social and cultural uplift of its members. The organisations should be based on a community, run by their members and their governance should be self-regulatory. These are fundamental universal values. Cooperatives are organisations that can help members when they are in crisis. They are different from the profit-oriented companies.

There are around 32,000 cooperatives across the country. Many of them aren’t active. Some were formed just to get funds provided by the government and they are limited to paper. If we study global trends, the majority of cooperatives work in productive sectors such as in the production of food, milk, fruits and other agricultural activities. But in Nepal, around 25,000 cooperatives are involved only in financial activities, mainly in collecting deposits and issuing loans. Such cooperatives are now in crisis. Over 15,000 are registered with an objective of collecting deposits. Even others registered as multi-purpose cooperatives are active mainly in savings and credits. Around 500 cooperatives are in trouble.

Who is tasked with monitoring and addressing the problems of cooperatives?

Cooperatives fall under federal, provincial or local levels based on their nature. Those that conduct transactions at inter-provincial level are regulated by the federal government. Those who operate within a province fall under the respective provincial authority while those operating within a municipality or rural municipality are regulated by local governments. Based on this provision, only 145 cooperatives fall under the federal government. Around 19 percent are under provinces while over 80 percent fall under local units. And most of the problems are with those operating in rural areas. Majority of them are involved in savings and credit activities. The government has officially declared only 20 cooperatives as crisis-ridden. The first one was Oriental Cooperative.

Coming back to your earlier question, our cooperative sector reached a state of crisis as these organisations didn’t follow fundamental values such as self-governance. They were guided by profit motives. Another problem is family control. For instance, members of a single family and their close relatives often control nearly all of an organisation’s activities. In some cases we found that someone has promoted his wife as a chair. He even signs as his wife. Likewise, husbands get loans based on the guarantee of their wives or vice-versa. Such anomalies are rampant.

Many such cooperatives don’t follow even basic rules. The third problem is investment in non-productive sectors such as real estate. The fourth problem is lack of regular meetings of board of directors and general assemblies. There is a provision of an account auditing system within the cooperatives that should thoroughly check their financial health. The law has even determined the auditor’s qualifications and rules to follow. These systems haven’t been followed.

Take for example the Shiva Shikhar Cooperative, one of the 20 cooperatives declared crisis-ridden. Around 3,200 of its depositors have registered complaints. Many more are in the process of doing so. Their claim for recovery is over Rs11 billion. We found that a single person has taken a loan of Rs5 billion on the guarantee of his wife. Billions of rupees have been given as loans without good collateral. Issuing loans without collateral or with weak collateral, giving loans to family members or relatives of cooperative officials are some reasons that have pushed cooperatives into crisis.

Another important factor is eroding trust of these organisations. The depositors have sought a return of their deposits as the organisations have failed to recover their loans and interests invested in non-productive sectors. Even some professional cooperatives have been impacted by this phenomenon. All aren’t bad. Around 7.4 million people are connected to cooperatives, and 94,000 people are employed in the sector across. It has contributed significantly to the national economy.

There are many agencies to oversee this sector. Why didn’t they address these issues on time?

Like I said, the municipality-level cooperatives should be regulated by the local governments, the provincial ones should be overseen by the provinces and the national-level cooperatives should be regulated by the federal agencies. But the regulating agencies aren’t efficient enough. If the responsible agencies had stepped in on time, things wouldn’t be so bad. They lack human resources and expertise. Likewise, the work hasn’t been effective also because of frequent transfer of officials from these agencies.

There has long been a demand for an all-powerful independent body like the central bank. That should have the authority to block properties and passports of the defaulters and those involved in financial embezzlement. In our recommendations, we have also stressed on the need for such a body as the cooperative crisis has already affected millions. Existing agencies can’t handle the situation. The local units, the representatives who are periodically elected and the staff working there cannot resolve these complex issues. Therefore, there is a need for a dedicated autonomous body to clean up this mess.

Various organisations such as National Cooperative Federation of Nepal are active in federal, provincial and district levels. The cooperative law has entrusted them with ensuring good governance, transparency, financial discipline, regular monitoring and raising awareness in their respective areas. But they are also mostly focused on financial transactions.

The Cooperative Act-2017 has a provision for a credit recovery tribunal. But it hasn’t been formed even six years after formulation of the law. Likewise, the law has made it mandatory to establish a credit information centre. Such a centre would help trace the people who take out loans from multiple places and know about the status of the loan. In its absence, we find the same person taking loans from multiple cooperatives and then defaulting. The Act has also made it mandatory to have a risk bearing fund, a reserve fund and a stabilisation fund to manage the situation in crises and protect cooperatives from probable operational losses. If these provisions are implemented, some problems of this sector can be removed.

Do you think we have more cooperatives than we need?

The number should be drastically cut. First of all, we should prepare a database based on the updated status of cooperatives, and they should be classified based on their performance. Those performing well should be put in the green zone, those likely to have problems should be categorised under yellow and those already in crisis due to the operators’ wrongdoings should come under the red zone. The authorities should take stringent action against those in the red zone.

Cooperatives operating in the same areas with the same objectives should be merged. We see cooperatives operating in every other building. The government should encourage them to merge by giving them incentives. We can bring down the 32,000 cooperatives to around 10,000. The third measure concerns the process of registration. Only those that have good objectives, plans and promoters should be registered. Now even those registered in Kathmandu are collecting money in Pokhara and Butwal by setting up branches there.

Also, auditors are responsible for promoting irregularities. They endorse wrong balance sheets even when they know a cooperative is in crisis. Such auditors should be punished.

What should the depositors do?

They should be well-informed about the cooperatives where they are going to park their deposits. Mostly, people are lured by high interest rates. Some choose cooperatives over banks when they have to deposit a big sum as they don’t need to show the source of the money to the cooperatives whereas banks seek the source.

Should there be a provision of showing the source of money in cooperatives as well?

Yes, there should be a provision of disclosing the source of deposits above a certain limit. We have to implement the money laundering Act in cooperatives. It is necessary because only around 1,000 of the 32,000 cooperatives disclose the source of money and make their transactions transparent.

Many say the central bank should be entrusted with regulating the cooperative sector while others are for establishing a separate powerful entity. What is your view?

The Rastra bank is busy handling the issues of the expanding banking sector. Existing infrastructure and human resources at the central bank aren’t enough to oversee the cooperative sector. It has been given a certain role even at present. It handles cooperative cases exceeding Rs500 million.

Of around 32,000 cooperatives, why only 20 have been declared crisis-ridden?

Eighty percent of cooperatives fall under local units. So, the local governments should declare them crisis-ridden and resolve the situation. But they don’t have that capacity. So they are requesting the federal agencies to do so citing lack of expertise. Same is the case in provinces. Bagmati and Koshi are trying to address some cases but they are facing problems. The provinces as well as local units have requested the federal agencies in writing to handle the cooperative issues. Therefore, we have emphasised the need for an all-powerful autonomous body to resolve cases nationwide. We have recently given the same feedback to the parliamentary committee as well.

Declaring a cooperative crisis-stricken is not enough. We need sufficient manpower, resources and logistics to look into them. Also, security arrangements should be ensured as even gangsters are involved in embezzling big amounts of cooperatives’ deposits.

Of the 20 enlisted as troubled cooperatives, the issues of only three cooperatives have been fully settled by the committee you head. At this rate, how long will it take to resolve cases of thousands of cooperatives?

You see, the Dharan-based Baraha Cooperatives fell into a crisis. The municipality officials say they don’t have expertise to resolve the financial matter worth billions of rupees. Provinces share the same problem. And even the central agencies have to complete a long process before declaring a cooperative crisis-ridden.

Can you elaborate on the type of body needed to resolve this crisis?

An all-powerful commission should be formed. It should have the authority to arrest suspects, take people into custody, seize the property and file cases in court. It should function like the Commission for the Investigation of Abuse of Authority. It should likewise be able to issue a nationwide notice to gather information about cooperatives and categorise them in green, yellow and red zones. The existing agencies can’t resolve this issue.

During a law amendment process in Parliament, lawmakers and experts were divided on whether there should be a limit in deposits of cooperatives. What is your view?

The bill that was under discussion in Parliament had a provision to fix the ceiling in deposits saying that cooperatives shouldn’t be allowed to collect billions of rupees like commercial banks. But some lawmakers registered amendments and removed the ceiling.

Where have the cooperatives invested most of the money?

They have invested in real estates, apartments, marts, vehicles and hydro projects. A huge amount has been locked up in real estate.

You said cooperatives should be self-regulated. It’s clear that they aren’t doing so. Do we need to rethink this basic idea?

You are right. If they were self-regulating, we wouldn’t have needed a powerful regulatory body. Self-regulation didn’t work in our context. Therefore, we need to use the state’s coercive power. We have to change our policy orientation as the fundamental concept of self-regulation failed. Laws should be updated and there should be a structural change in our regulatory bodies. The state should present itself stringently, at least for one time, to give justice to millions of people.