Potential defaulters flocking to poorly managed co-opsCooperatives failing to maintain financial discipline have been attracting a large number of potential loan defaulters seeking to benefit from their mismanagement and lax implementation of rules, officials said.
Cooperatives failing to maintain financial discipline have been attracting a large number of potential loan defaulters seeking to benefit from their mismanagement and lax implementation of rules, officials said.
These financial institutions have put themselves at risk by issuing loans against poor quality securities due to lack of proper accounting system as they are short staffed.
The Cooperatives Act 2017 talks about forming a committee to deal with the accounting system at cooperatives. The act has envisioned involving trained manpower in the supervising committee that is authorised to assess the quality of collateral while issuing loans.
However, a large number of cooperatives are conducting business without well trained manpower in their account supervision committee. As a result, they are providing loans without even completing the paperwork.
Similarly, cooperatives have been issuing loans to individuals with bad track records. “Cooperatives have become an easy gateway to obtain loans for bank defaulters and individuals without any income source or necessary documents,” said Thanesor Bashyal, chartered accountant at the National Cooperative Federation of Nepal.
Presenting a paper at a two-day workshop organised by the federation, Bashyal said that many cooperatives had been providing housing loans without assessing the actual value of the property. The existing act has directed cooperatives to have the value of the collateral assessed by the supervision committee. “However, these cooperatives are fixing the price of the property based on prices set by brokers,” Bashyal said.
According to him, a large number of flaws have also been detected in hire purchase deals. Bashyal said that cooperatives had been found to have issued loans based on overvalued second hand four-wheelers.
Failing to implement the ‘know your customer’ requirement, naming the spouse as the guarantor while issuing personal loans, failing to update the accounting software and not maintaining uniform software are among the problems seen in the sector.
Bashyal also underscored the fraudulent practice of window dressing when preparing the balance sheet. According to him, many cooperatives have been capitalising bad debts and interest amount to give a misleading picture of good financial health.
Similarly, a number of cooperatives have been issuing large dividends to their members even when they are in the red. “Although the Cooperatives Act has barred cooperatives from issuing dividends amounting to more than 15 percent of their profit, many cooperatives are providing dividends amounting up to 25 percent to their members” Bashyal said. “These malpractices have put the financial health of many cooperatives at risk.”
The constitution has provided adequate room for cooperatives in many areas, but lack of trained manpower has created a serious problem for them. Raghuram Bista, joint secretary at the Ministry of Agriculture, Land Management and Cooperatives, said cooperatives failing to implement an internal control mechanism had been posing a threat to good governance in the sector. “Likewise, domination by middlemen has been affecting the cooperatives businesses,” Bista said.
As per the ministry, high political influence, issuance of loans to artificial members, failure to invest funds in productive sectors and poor implementation of government rules are among the problems. Babul Khanal, deputy general manager of the federation, underlined poor management, inadequate funds for risk management and lack of coordination among cooperatives as major setbacks in the sector.