The government is preparing to set up a permanent monitoring commission through the budget statement in a bid to streamline large cooperatives amid growing numbers of loan defaulters. According to Finance Ministry officials, the proposed commission will be under the Ministry of Agriculture, Land Management and Cooperatives.

“The commission will include chartered accountants to assess the actual financial health of large cooperatives that have an annual turnover of more than Rs50 million,” said a Finance Ministry official. According to the source, the commission will receiving funding partly from government coffers and partly from taxes collected from large savings and credit cooperatives.

There are 34,512 cooperatives operating in the country including 14,000 savings and credit cooperatives. In 2016, they held deposits totalling Rs302.2 billion and issued loans worth Rs274.2 billion, according to government statistics. More than 600 cooperatives are estimated to have an annual turnover of Rs50 million and above.

Despite holding massive deposits, the cooperatives sector is poorly regulated. The Department of Cooperatives, the regulator of the sector, remains inactive due to lack of manpower and other resources.

With the country adopting a federal system, local governments have been given the responsibility of coordinating with cooperatives. Accordingly, the government has dissolved all 38 division cooperative offices operating at the local level.

“The government has aimed to address the vacuum seen in the supervision of the cooperatives sector by establishing the monitoring commission,” said the Finance Ministry source.

The Money Laundering Prevention Act requires cooperatives to develop mechanisms for risk management, closely monitor their business activities, identify suspicious transactions, carry out transactions by remaining within the threshold and keep a close eye on annual transactions beyond Rs3 million.

Lack of government monitoring has prompted many cooperatives to engage in suspicious transactions. Likewise, they have not been submitting reports to the concerned government authorities and maintaining transparency in the cooperatives business.

Taking advantage of the poorly regulated sector, a large number of potential loan defaulters seeking to benefit from mismanagement and lax implementation of rules have been flocking to cooperatives, thus putting the deposits of the general public at risk.

As per the National Cooperative Federation of Nepal, cooperatives have become an easy gateway to obtain loans for bank defaulters and individuals without any income source or necessary documents. Many cooperatives have been providing housing loans even without assessing the actual value of the property.

In the past, many cooperatives have become involved in fraudulent practices due to lack of effective monitoring of the sector. A high-level commission formed under Special Court judge Gauri Bahadur Karki in 2013 discovered that at least 155 financial cooperatives had gone bust largely because of unsound lending practices, exposure to the real estate market and embezzlement by the promoters.

The commission subsequently declared 71 cooperatives, including Oriental Cooperative, to be ‘problematic’. Oriental Cooperative alone has been accused of embezzling deposits totalling Rs5.2 billion.