New Directives On Cooperatives

The Nepal Rastra Bank (NRB) has recently come up with directives and standards, 2081 for the regulation and supervision of savings and credit cooperatives to make their transactions systematic, transparent and effective. The directives and cooperatives deal with deposits, loans, investments and other relevant matters. According to the directives and standards, the cooperatives can mobilise deposits up to 15 times the primary capital fund. The primary capital fund includes paid-up capital, reserves, accumulated profits and the like. The cooperatives can also avail themselves of loans from banks and financial institutions (BFIs) and the Cooperative Bank up to five per cent of the total assets but not exceeding 100 per cent of the primary capital fund.

According to the directives and standards, the cooperatives can mobilse deposits through three types of deposit accounts: ordinary (normal), regular (recurring) and term deposits (up to three years). From now onwards, regular deposits should make up at least 25 per cent of the total deposits. This provision may be a headache for the cooperatives as people cannot be forced to open regular savings accounts. Most people prefer term deposits. Those who have to frequently withdraw money go for normal savings accounts. 

The directives and standards have put restrictions on deposit mobilisation. The cooperatives having a jurisdiction in one district can mobilise deposits of a maximum of Rs. one million per member. If the cooperatives have their jurisdiction in two or more districts, they are permitted to mobilise Rs. 2.5 million at most per member. Likewise, cooperatives operating in more than one province can mobilise deposits of up to Rs. 5 million per member. The deposits maintained prior to Poush 14, 2081 will have to be regularised within two years. 

Deposit mobilisation

Most of the cooperatives in the country are operating in one district only. The slab of Rs. one million per member will, for sure, affect their deposit mobilisation. Most of the cooperatives have already been in dire straits, especially since the outbreak of the COVID-19 pandemic. The economy of the country has not fully recovered yet. As such, the deposit cap may bring about an existential crisis for cooperatives. The deposit limit should have been based on the primary capital fund.

According to the directives and standards, the disclosure of sources of deposits over one million is mandatory. This applies to cooperatives operating in more than one district or province. For the cooperatives with their jurisdiction covering a single district, this provision is not relevant because of the deposit cap of Rs. one million. This provision is designed to curb money laundering. 

Regarding loans, the directives and standards have put a cap of 15 per cent of the primary capital fund on loans per member. The cooperatives are not permitted to disburse loans to their members whose membership falls short of three months. This provision may discommode those who are not members but who need loans immediately. They may not wait for three months considering the urgency of the funds they need. There is a provision for loans for regular deposit-holders. They can avail themselves of loans five times the deposits or up to Rs. 0.5 million without offering any collateral. However, two of the members should stand guarantor for such loans. 

The cooperatives can borrow from BFIs and the Cooperative Bank against the collateral of their borrowers. But, such loans should not exceed the amount of loans of the borrowers. The cooperatives can disburse loans up to 60 per cent of the collateral value of the immovable property in metropolises and sub-metropolises and up to 70 per cent in municipalities and rural municipalities. In case of project loans, 80 per cent of the project cost can be financed. 

From now onwards, third party collateral will not be recognised. Only the collateral of the borrowers or their immediate family members is considered valid for the security of loans. The third-party collateral existing before the issuance of these directives and standards will have to be regularised by Asar-end, 2083. This provision may give some borrowers a headache if they do not have adequate property for collateral in their or their immediate family members’ name. In such a case, they may have no option but to settle their loans by managing funds in one way or another. 

Loan classifications

The cooperatives will have to make loan provisioning based on the classification of loans: one per cent for good loans, 25 per cent for substandard loans, 50 per cent for doubtful loans and 100 per cent for bad loans. After the default of a single instalment, the whole loan will have to be provisioned on the basis of the overdue period. Problematic loans can be restructured or rescheduled by the Board of Directors under special circumstances as per the requests from borrowers when the NRB has issued the relevant directives. 

The cooperatives will have to provide the same interest on similar types of deposits and loans as per the published rates of interest. They will have to maintain the interest spread rate at 6 per cent. The Board of Directors will consist of five to nine members, including the chairman, with 33 per cent seats reserved for women to the extent possible. The members of the same family are not permitted to be on the Board of Directors and the Audit Supervision Committee during the same period. A member cannot be on the Board of Directors for more than two terms. 

The directives and standards have been issued to regulate and supervise the cooperatives in view of some cooperatives misappropriating billions of hard-earned money of their depositors. However, owing to one or two provisions, such as deposit restrictions, the outcomes of the directives and standards cannot be predicted right now. They are in the womb of time.

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