To ensure better protection of people´s savings, the Ministry of Cooperatives and Poverty Alleviation has drafted a regulation on monitoring and regulation of financial cooperatives that, among others, delegates power to cooperatives associations to conduct inspection of cooperative units, which operate like banks. [break]
The draft regulation also makes insurance coverage mandatory for deposits of up to Rs 1 million, includes provision on blacklisting of corrupt promoters, allows scrapping of units that fail to adhere to government rules, makes regular disclosure of financial reports compulsory and paves the way for creation of a stabilization fund to ensure availability of liquidity in cooperatives.
The draft comes at a time when a couple of large savings and credit cooperatives are facing financial problems due to imprudent lending practices, management oversight and inefficient board of directors. It is feared contagion of the problem to other such units would create a disaster as savings and credit cooperatives now hold far more deposits than all the development banks combined.
Although the government is well aware of the consequences emanating from failure of financial cooperatives, it also knows that it does not have resources to monitor and regulate all these units as their number has now swollen to around 12,000.
This bitter truth has led the government to pitch the idea of mobilizing the National Federation of Savings and Credit Cooperative Unions and its member associations to conduct on-site and off-site inspections of financial cooperatives.
"The responsibility of conducting inspections of savings and credit cooperatives lies with the Department of Cooperatives and offices under it or in central cooperatives association," the draft regulation says. "The inspection teams mobilized by these authorities can also visit project sites to evaluate credit risks."
- Inspections to be conducted by cooperatives associations
- Insurance coverage for deposits of up to Rs 1 million
- Blacklisting of corrupt promoters
- Cooperatives violating rules to face dissolution
- Creation of stabilization fund to thwart liquidity shortage
These onsite inspections should be conducted at least once a year in category ´A´ financial cooperatives, at least once every 18 months in category ´B´ units, at least once every two years in category ´C´ cooperatives and at least once every 30 months in category ´D´ cooperatives, according to the draft, which has categorized financial cooperatives based on their gross assets.
For instance, financial cooperatives with gross assets of over Rs 250 million have been classified as category ´A´ cooperatives. Those with gross assets of over Rs 50 million to Rs 250 million have been identified as category ´B´ financial cooperatives, while cooperatives with gross assets of Rs 10 million to Rs 50 million are classified as category ´C´ financial. Cooperatives with gross assets lower than Rs 10 million have been termed category ´D´ cooperatives.
After completion of onsite inspection, the team should prepare a report and submit it to the cooperatives department, offices under it or central cooperatives association within next five days. "But in case the inspection team detects embezzlement of funds or activities that goes against the interest of depositors, the cooperatives department or offices under it can take immediate action," says the draft.
These actions include blacklisting of people involved in fraudulent activities, partial or complete halt in transaction of cooperatives and closure of branch offices or contact centers that continue to violate cooperative norm.
"Based on the gravity of the problem, concerned authorities can forward the case to the police or local administration. They can also revoke the operating license of cooperatives and initiate process to dissolve them," the draft says.
To better protect the interest of cooperative members, the draft regulation also recommends insurance coverage for deposits of up to Rs 1 million. "(For this), every cooperative should contribute amount equivalent to 0.5 percent of the total deposits per year to the association of which it is a member," says the draft. "The associations can invest the fund by evaluating risks."
The draft regulation also recommends formation of a stabilization fund to ensure cooperatives do not face liquidity shortage. "To raise required sum of money to operate the fund, every cooperative should contribute amount equivalent to 0.3 percent of the their gross asset to its parent association," the draft says.
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