Alleged irregularities by promoters of several cooperatives including Sudarshan Cooperative based in Pokhara, to the extent of depriving the members of their deposits, have once again highlighted the poor regulation of the community-level lending sector.

Experts blame weak law enforcement and the government’s reluctance to act against defaulting promoters for enabling the shady operators of saving and credit cooperatives, mostly those based in urban centres. They are thus encouraged to make arbitrary decisions on credit disbursement, denying depositors their hard-earned money in times of need.

Stakeholders said that the conflict of interest of many politicians, who also run the cooperatives, prevented Parliament from passing the law that would give the regulatory agency more teeth to punish unruly cooperatives and their promoters.

The Sundarsan Cooperative based in Pokhara and the Sahara Cooperative based in Chitwan are currently in the spotlight after Kantipur daily, the Post’s sister newspaper, reported how the group promoting these cooperatives misused the money deposited by their members.

Citing a probe report by Pokhara Metropolitan City, Kantipur reported that money deposited to Sudarshan Cooperative was transferred in the name of Gorkha Media Network that runs Galaxy 4K Television—where Gitendra Babu (GB) Rai is the chairperson—other cooperatives run by the group led by Rai, his person accounts, his kin and television staff.

According to the report, a loan amounting to Rs10 million was also issued in the name of Rastriya Swatantra Party Chairperson Rabi Lamichhane, who was the founding managing director of Galaxy Television. Lamichhane, however, has publicly rejected the allegations, claiming that he never received the loans—that he was ineligible as he is not a member of the cooperative.

Sahara Cooperative also allegedly lent Rs117.1 million to Galaxy Television, according to the Kantipur report.

In September, the Kaski District Court issued arrest warrants against the promoters of these cooperatives including Rai after their irregularities surfaced. Rai is still at large. A number of other cooperatives have also plunged into crisis after their promoters ran away with billions of rupees deposited by ordinary people.

A task force led by the National Planning Commission member Jay Kant Raut that was formed to recommend measures to reform the cooperative sector has pointed out a number of anomalies, particularly in the saving and credit cooperatives.

According to the panel’s report, one of the key reasons behind the crisis in some cooperatives is the tendency of select promoters to misuse cooperatives for their personal benefit.

Some cooperatives landed in crisis after their promoters got licences to operate nationwide and thus collected huge amounts of deposits. These deposits, they lent to the firms they themselves ran or asked their kith and kin to do so.

This is not the first revelation of the misuse of the funds deposited in the cooperatives.

After studying the problems in troubled cooperatives, a report of the high-level commission led by former Special Court chairperson Gauri Bahadur Karki in 2013 highlighted malpractices at the hands of cooperative promoters.

Even earlier, a Nepal Rastra Bank team had also reported the irregularities in big cooperatives. “In 2010, the central bank prepared a report on the conduct of about a dozen large cooperatives and pointed to several irregularities at the hands of their promoters,” said Keshav Acharya, former executive director of the NRB. “But the report was shelved.”

Subsequently, several cooperatives landed in trouble, including large ones like Oriental and Guna. In its wake, the government had formed the Karki-led high-level commission.

“The main reason behind the continuation of these problems is the culture of impunity, as those responsible for cheating cooperative members were not punished,” said Acharya.

The Karki-led commission discovered that at least 155 financial cooperatives had gone bust largely because of unsafe lending practices, exposure to the real estate market and embezzlement by their promoters. Most of the complaints it received were related to the two large cooperatives—Oriental and Guna.

The Karki-led team had submitted a draft bill with a number of stringent regulatory and penalty provisions. One of the clauses in the draft was that cooperative promoters should be jailed for up to 20 years for large-scale fraud.

As per the Cooperative Act that is in effect, if the embezzled amount exceeds Rs1 billion, the cooperative promoters are imprisoned for eight to 10 years.

“The lawmakers who had a conflict of interest in cooperative organisations were influential in removing the stringent measures initially provisioned in the bill,” said Karki.

However, the current law, introduced in 2017, has still more stringent measures compared to the old Act. As many politicians run cooperatives, they didn’t want their business to be affected by stringent laws, said Karki.

Karki also pointed out the failure of regulatory agencies to use their power for the good of cooperatives. “People in regulatory agencies take money from cooperative promoters and shut their eyes to the wrongdoings,” he added.

Besides, the regulatory agency cannot watch over 23,000 cooperatives registered across the country, according to a report of the latest taskforce.

“There is no legal and administrative set-up under the provincial and local governments to regulate cooperatives,” the report says. “The Department of Cooperatives, which is responsible for regulating limited big cooperatives, also has limited institutional set-up.”

Karki agreed with the assessment of the taskforce on lack of legal and institutional mechanisms at the provincial and local levels.

The cooperatives fall under the concurrent jurisdictions of the three tiers of government, according to the constitution. “The Department of Cooperatives should have made necessary recommendations to the provincial and local governments on the regulation of cooperatives,” said Karki.

The Raut-led task force recommended a separate and powerful body to regulate the saving and credit cooperatives. Over a decade ago, the central bank had also envisioned an agency under it to oversee cooperatives and micro-finance institutions.

A bill registered at the House of Representatives on money laundering has suggested amending the Nepal Rastra Bank Act-2002, enabling the central bank to regulate the saving and credit cooperatives with a share capital of over Rs250 million and an annual turnover of Rs500 million.

The Karki-led committee had suggested that the central bank regulate cooperatives with over Rs5 million in annual deposits. “As there are no other agencies capable of regulating large cooperatives, the central bank should take the responsibility,” said Karki.

But Acharya said that the best option would be to establish a separate regulator as the central bank won’t be able to regulate so many financial institutions. “A legally strong regulator should be formed while the central bank can provide technical support,” said Acharya.

Besides pointing at the need for a separate watchdog, the task force has also suggested that cooperatives issue white papers on their financial status and submit them to the regulatory agency along with a plan on returning members’ deposits.

In line with the recommendation, the Department of Cooperatives had instructed the cooperatives under its jurisdiction to submit such documents. As such, an action plan on returning the deposits should have been submitted by mid-December.

“A majority of cooperatives under our jurisdictions have submitted their action plans,” said Pitambar Ghimire, registrar at the department. The department had also instructed them to submit property details of the board of directors and members of the auditing committee and the manager to the regulator by mid-December. “We have received the details from most of them,” Ghimire said.