Uttam Maharjan

The Department of Cooperatives has fixed the reference interest rate for cooperatives at 14.75 per cent since Kartik of 2077 BS. This means the cooperatives are not permitted to charge interest on loans beyond this rate. The provision of the reference interest rate is encapsulated in the Cooperative Act, 2074 BS. The rate of interest can, however, be amended keeping abreast of the situation. There is a liquidity crunch in the market now. The crisis has been lingering for quite a long time. Consequently, banks and financial institutions are finding it heavy going to invest in the lending sector. There are some contributory factors to the deepening liquidity crisis: a lower inflow of remittances from abroad, low capital expenditure and such other factors.

Because of the liquidity crisis, there is a shortage of loanable funds in the banking sector. In order to stave off the liquidity crisis by mobilising larger deposits from the public and institutions, most banks have jacked up the rate of interest on deposits up to 11.03 with effect from Falgun. With this development, the cooperatives are apprehensive that their deposits may be diverted to banks. With the reference interest rate fixed at 14.75 per cent, most cooperatives are not in a position to increase the rate of interest on deposits. The National Cooperative Federation, the umbrella organisation of the cooperatives in Nepal, has demanded that the referent interest rate be hiked to 17 per cent, up from the current 14.75 per cent, with provision for charging up to 6 per cent above the base rate.

Poverty alleviation
The cooperative sector is considered one of the four pillars of the national economy. The number of cooperatives in Nepal has burgeoned after the introduction of multiparty democracy in 1990. The number of cooperatives in the country stands at 29,800 with the combined share capital of around Rs. 94.11 billion. The total deposits stand at around Rs. 478 billion, with the total loan portfolio standing at around Rs. 427 billion. And around 89,000 people are directly employed in the cooperative sector.

The Ministry of Land Management, Cooperatives and Poverty Alleviation has not been positive towards the demands of the cooperatives. The Ministry is ready to solve the problems of the cooperatives but not ready to hike the reference interest rate. The Ministry is of the view that the lending rates being charged by the cooperatives are already high and so the rates should be reduced, if possible.

However, the Department of Cooperatives has taken a positive attitude towards the demands. It may be mentioned that there is an Interest Rate Review Committee under the coordination of the Registrar of the Department of Cooperatives. The committee comprises representatives from the Ministry of Finance, the Ministry of Cooperatives and Nepal Rastra Bank. The Department of Cooperatives has assured the cooperatives that the committee will make an appropriate decision after holding deliberations.

The cooperatives are running on the limited resources they have. They cannot compete with banks. Their capital is peanuts as compared to that of banks. When banks give higher interest to the public, it is natural that deposits may be diverted to banks. In such a situation, the cooperatives will have to increase the rate of interest on deposits. But the ceiling on the rate of interest on loans acts as a stumbling-block.

It is a no-brainer that the provision of the reference interest rate was introduced to prevent the cooperatives from charging exorbitant interest on loans. Before the provision was introduced, there were complaints that some cooperatives were charging as high as 20 or 22 per cent interest on loans. To put the kibosh on such a malpractice, the provision of the reference interest rate was implemented.

The provision of the reference interest rate is not monolithic. It is the responsibility of the government to facilitate the operation of the cooperatives. When banks give 11 per cent interest on deposits, the cooperatives should be able to give at least 12 per cent. Otherwise, people will go for banks. With the maximum rate of interest on loans fixed at 14.75 per cent, most cooperatives cannot give 12 per cent interest on deposits. This is where the rub lies.

Not all cooperatives are running like a clockwork in the country. The COVID-19 pandemic has badly affected the cooperative sector. The cooperatives are thus going through a bad patch. In the meantime, the hiking of interest on deposits in the banking sector has hit the cooperative sector. This has encumbered the survival of the cooperatives already in difficulty.

There is no doubt that the cooperatives should be regulated. Malpractices in several cooperatives have also come out into the open. It is also reported that some cooperatives are charging heavy service charges to loan clients. There are also cases of cooperative operators decamping with depositors’ money. Such malpractices must be brought to an end.

Measures
However, under the present circumstances the government should take stock of the cooperative sector and take appropriate measures to ease the operation of the cooperatives. The Ministry of Cooperatives is of the view that the lending rate should not be increased; rather, it should be decreased for the convenience of the members of the cooperatives.

Yes, the cooperatives are running for the convenience of members. But for this to happen, the cooperatives should be strong themselves in the first place. Moreover, the government should keep abreast of the changing times. So it would be prudent on the part of the government to hike the reference interest rate in view of the increased interest rate in the banking sector. The rate can, however, be revised down once the deposits rates in the banking sector come down.

(Maharjan has been regularly writing on contemporary issues for this daily since 2000. uttam.maharjan1964@gmail.com)