Prime Minister of India - Dr. Manmohan Singh

PM's speech at the Chief Minister's Conference on revival of Co-operative credit structure

"I am delighted that all of you have been able to join us here at this very important meeting. This meeting is important in many ways but more so because the subject that you are going to discuss has great relevance for improving our cooperative credit delivery system, which in turn is vital for a qualitative jump in the performance of our agriculture. I would like a very frank and free discussion on how we can collectively give effect to the recommendations of the Task Force on co-operative credit systems. Let me first thank Professor Vaidyanathan and his colleagues for their excellent work. They have produced a very useful and thought-provoking report and it is now for the political leadership both at the Central and State to rise to the occasion to give their ideas a practical shape.

In the last decade, the growth of our agricultural sector has not kept pace with either our needs or our legitimate ambitions. If our economy has to grow at 7-8% per annum, and it must do so if we have to eliminate poverty within the next decade, agriculture too must demonstrate a growth rate of about 4% per annum. For this to happen, there has to be a major improvement in our agricultural production practices. There has to be greater commitment to innovation in the technologies that are brought to bear in farming and an enhancement in the investments being made in the entire agricultural production chain. This requires and that's inevitable growing monetisation and growing commercialisation of the agricultural economy, perhaps, at a pace never thought of before. As our agricultural system gets commercialised, with increasing participation of farmers in markets not only for agricultural products but also for agricultural inputs, farming starts taking on a new commercial and economic meaning. In such a scenario, and I dare say that such a transformation of our agriculture is essential, easy availability of agricultural credit has a very important influence on agricultural production, on agricultural investment and on technological upgradation of our agriculture. Therefore, we need -- and we need it urgently - to put in place a credit delivery system that is equal to the task and the challenges that our agricultural economy faces.

In our institutional framework, agricultural credit was designed to be delivered through a multi-agency mechanism consisting of commercial banks, regional rural banks and the cooperative credit system. This multi-agency mechanism worked well over a period of time. Within the multi-agency mechanisms, the cooperative credit system played a leading role. Not only was the cooperative movement an invaluable inheritance of our national movement for freedom, but over the past half century it has played an extremely important role in the development of our economy, especially the rural economy. Co-operatives have played an important role in the delivery of credit to the farm sector and have oiled the wheels of the rural economy. The system we must recognize developed an unparalleled penetrative reach, even in remote, inaccessible areas. It is also clear that as compared to the commercial banks and Regional Rural Banks, cooperatives have a much higher proportion of clients from among small and marginal borrowers and they constitute the great majority of our farming community.

However, it's also a fact that flaws and institutional bottlenecks have come to be observed in the last decade or more. The Cooperative Credit System, which has a very important role, has failed to live up to our expectations to the desired extent. The contribution of cooperatives to the supply of farm credit has dropped sharply from about 70% to about 30%. This has contributed to rural distress in large sections of our farming community. In my own travels across the country in rural areas, the problem of declining institutional credit for agriculture has been a common and persistent complaint of farmers in distress.

This is why the National Common Minimum Programme places significant emphasis not only on enhancing rural credit but also revitalizing the cooperative sector. We had set an ambitious target last year of doubling agricultural credit flow in three years and we are on target so far. However, much more needs to be done. We need to ensure that the proportion of investment credit increases even as agricultural credit rises. We need to ensure that the needs of small and marginal farmers, who are even more dependent on informal sources of credit, are met through the institutional credit system so that they can be rescued from the clutches of the traditional village money lender.

All this of course, requires a strong, healthy, dynamic and efficient cooperative credit system. Cooperatives may not have delivered as per our expectations but they need to be revitalized and made effective. I recall in the early 50s Prof. D.R.Gadgil presided over a path-breaking report on rural credit and the theme of that report was - 'Cooperatives have failed but cooperative must succeed'. I think that theme is as relevant today as it was, if India's rural economy is to measure up to the challenge of its regeneration and revitalisation.

Cooperatives are today at the crossroads. In many States we only have cooperatives in name, with very little stake-holder participation in their management. There have been no elections held for years. Government officials and ministers at the State level run the affairs of many of these so called cooperatives. There is no proper audit, little accountability often and poor governance. This state of affairs must change and must change rapidly. Of course, there are States in which the cooperatives are thriving. They should set an example for others to follow.

The report of the Task Force has suggested a roadmap for revitalizing the cooperative credit set-up. It is built around a revival package for cleaning up their balance sheets and recapitalising them; on capacity building and qualitative improvement of personnel in the system; on institutional restructuring; and last but not least, on improving the regulatory regime within which the cooperative credit system has to function if it is to flourish in years to come. I believe that Chief Ministers should pay greater attention to these issues. What is important is that all the elements should be seen as a combined package rather than as separate, disparate elements to be chosen or dropped individually.

The re-engineering framework advised by the Task Force is in the nature of an action plan premised on four principles.

� One, that notwithstanding qualitative impairment, cooperatives are on balance, relevant and should be turned around;

� Two, that the revival strategy needs to be a combination of financial restructuring and radical institutional reform;

� Three, that the objectives of financial restructuring are to induce legal and institutional changes, and;

� Four, that the purpose of legal and institutional reforms is to make the cooperative system democratic, member-driven, autonomous and self-reliant.

I think these are all valid propositions. The purpose of this workshop is to examine all the elements of the package and generate a consensus for taking the process forward. This raises a number of questions that need to be answered. The current regulatory impasse under which even the Reserve Bank of India can enforce regulatory compliance only through the mechanism of the Registrar of Cooperative Societies, its relevance, its viability needs to be examined. Is the institution of the Registrar of Cooperatives an adequate mechanism for better governance and regulation of cooperatives? Are there any alternatives? If so, what are their merits?

There is no way in which a cooperative bank can be equated with a cooperative marketing society for regulatory purposes. The Task Force feels that a cooperative bank, being a repository of public deposits - and, therefore, of public faith - has to be regulated by the Banking Regulator.

Should the RBI do this job? Or should we set up new agencies for this task? These issues need careful examination. On the legal and regulatory side, there is fortunately a consensus that these issues have to be sorted out.

I also agree with the view expressed by the Task Force that any financial restructuring without addressing the root causes of the persistent weaknesses of the cooperatives would not result in a sustained revival of the cooperative credit system. Specific legal measures therefore, need to be taken to enable cooperatives to evolve into genuinely democratic, self-governing and financially well-managed institutions. The Task Force has correctly recommended that any approach to the financial restructuring of cooperatives should be contingent on a commitment on their part and on the part of State Governments to the implementation of legal and institutional reforms.

I think we should consider seriously the many recommendations of the Task Force on governance and institutional reform. For example the idea of conferring full voting membership rights on all users of financial services including depositors; removing state intervention in the administrative and financial matters in cooperatives; removing the provision for government equity and participation in the Boards of cooperatives; withdrawing restrictive orders on financial matters; permitting cooperatives freedom to take loans from any financial institution and not necessarily from only the upper tier; and similarly placing their deposits with any financial institutions of their choice. These are some of the options, merits, demerits need to be carefully examined. State governments must also eschew the temptation to supersede cooperative credit institutions management Boards, and ensuring timely elections before the expiry of the terms of the existing management systems.

I appreciate the fact that the re-engineering framework proposed relates to all tiers in the cooperative system, based on a "bottom up" approach, with special emphasis on strengthening the base of the co-operative credit structure. It appears that financial restructuring will have to be from a mix of resources from the Central Government, States and cooperative credit institutions. Where State Governments are not in a position to provide funds towards their share of the package, they may be allowed to raise resources through market borrowings or similar sources.

I am sure that by the end of your deliberations today, we would have developed a broad consensus on carrying forward the process of revitalizing cooperatives and that you will be able to finalise a viable roadmap of reforms for this vital sector. In your successfully meeting these challenges lies the future growth of our agricultural economy. Agriculture needs a new thrust of investment, a new thrust productivity inducing measures, a new wave of entrepreneurships and the agricultural credit system is the kingpin of this new structure which will determine what happens to our agriculture in years and decades to come. Therefore, great significance attaches to your deliverations. I wish you all success in this endeavour."