Cooperative Ordinance Seeks To End Anomalies

The government has recently come up with the ordinance on cooperatives to amend the Cooperative Act, 2074 to make reforms in the cooperative sector as the existing mechanism of regulating, supervising and monitoring cooperatives has miserably failed, giving rise to anomalies in the cooperative sector. As per the provisions, the existing National Cooperative Development Board will be replaced by the National Cooperative Regulatory Authority, which will be a powerful and autonomous body. All the savings and credit cooperative societies (SACCOS’s), operating at federal, provincial and local levels, will have to be registered under the Authority within a year.

As per the provisions, a person cannot be a member of more than one cooperative of the same nature. The incumbency of directors will be confined to two terms. The cooperatives will have to join the Credit Information Bureau (CIB) for the exchange of details on loans. They will have to provide the Bureau with details of loans above Rs. one million, and details of loan defaulters every three months. Further, they will have to be members of the Deposit and Credit Guarantee Corporation (DCGC). The DCGC will guarantee the return of deposits up to Rs. 500,000 to depositors of troubled cooperatives. The CIB and DCGC will work for both banks and cooperatives. 

Guidelines

The cooperatives will have to follow the guidelines and directions issued by the Nepal Rastra Bank (NRB) from time to time. This means they will be under the supervision of the NRB, albeit indirectly, and the guidelines and directions applicable to banks will also have to be followed by the cooperatives. The Authority will be entrusted with the powers equivalent to those of a district court. The Authority can act on complaints about the misappropriation of cooperative funds. Those cooperatives that breach the provisions will be subject to fines ranging from Rs. 0.5 million to Rs. 1.5 million. They may even face dissolution. Those board members/directors, officials, managers and staff acting in contravention of the provisions will face fines from Rs. 100,000 to Rs. 500,000.

 However, there is a provision that will allow appealing to the High Court within 35 days against the punitive action initiated by the Authority. The basic thrust of the ordinance is to create an enabling environment so that the depositors of troubled or problematic cooperatives can be returned. There is a provision for the return of deposits of up to Rs. 0.5 million on a priority basis. For deposits exceeding this amount, such deposits will have to be returned proportionately by making guidelines on a time-bound basis. For this, the cooperatives can sell collateral by auction. Or, they can mobilise funds from the sale or leasing of land, buildings, equipment or machinery. 

The Authority will have funds provided by the government, the funds received from foreign countries, associations or agencies and other funds. However, permission from the Ministry of Finance is required to receive funds from foreign countries, associations or agencies. There is also a provision for mediation. In case misappropriated funds are returned to the depositors concerned, there could be mediation. It will be applicable to lawsuits filed against the misuse of deposits or failure to return deposits, cases under consideration of courts or cases that can be settled through mediation. However, mediation will not be allowed in such cases as organised crime, money laundering or other criminal offences. 

The ordinance primarily aims at returning misused deposits to the depositors concerned. It would be relevant to mention that it has been six months since the government announced that misused deposits of up to Rs. 500,000 would be returned to the depositors of troubled cooperatives. The government even introduced a savings return programme. But no action on this front has been initiated. It is an irony to wait for the formation of the Authority for this.

The ordinance also aims at reducing risks at the cooperatives by designating limits on deposits and loans. There will be a limit of Rs. one million each on deposits and loans per person for the cooperatives operating in a single district, of Rs. 2.5 million for the cooperatives operating in more than one district and of Rs. 5 million for the cooperatives operating in more than one province. Deposits will have to be regularised within two years but the ordnance is silent on loans. Perhaps, new loans as well as renewed loans will have to be disbursed as per the limit.  

Fund mobilisation 

There are over 35,000 cooperatives in Nepal and around 8.75 members are associated with these organisations. Out of them, around 80 per cent are local-level cooperatives and 21 per cent are provincial-level cooperatives. As district-level cooperatives will not be able to mobilise more than Rs. one million in deposits per person, there are apprehensions that their deposits will decline drastically. Further, they will not be in a position to disburse loans over Rs. one million per person. At a time when they are going through a bad patch owing to a downturn in economic activities, these limits will further shrink their transactions. They may not be able to bear even operation costs, let alone make profits. Consequently, their very survival may be at stake.   

The limits on deposits and loans may be leveraged by banks. Those having deposits above the prescribed limits will go to banks. Banks can mobilise such deposits at a lower rate of interest. Likewise, those needing loans over Rs. one million will also approach banks. The limits on deposits and loans do not seem to be viable. It would be more prudent to fix such limits on the basis of capital than on the basis of levels – federal, provincial and local.   

(Maharjan has been regularly writing on contemporary issues for this daily since 2000.)