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The Three Tier
1 Introduction
1.1 The success of democracy as means
of governance is attributed to the
prevalence of several preconditions.
Conversely, there are several conditions
that are not conducive or propitious for
successful democracy. Two such
unpropitious conditions identified by
John Stuart Mill are multi ethnic societies
and linguistically divided countries. He
argues that democracy is “next to
impossible” in the former and
“completely impossible” in the latter. The
second set of conditions that put paid to
good democracy are poverty and
illiteracy. The success of maintaining
democratic rule is linked to socio-
economic development. True measure
or yard stick of the phrase “socio-
economic development” lies in the
absence or near absence of both, poverty
and illiteracy. The terms poverty and
illiteracy needs explanations in the
Indian context as the meanings or
understanding of these terms have been
seriously limited or “framed” by widely
disseminated restrictive definitions.
Literacy is very widely understood as
minimal literacy, the corollary meaning
* C P Mohan, Deputy General Manager & Member of Faculty, Reserve Bank of India, College of Agricultural Banking, Pune
Three
CreditCooperatives in India-
CreditCooperatives
Governance and Management :
Burden of Origin and the
Burden
Argument for a New PParadigma
Argument aradigma
C.P.Mohan*
that illiteracy means the inability to “read” and sign (draw) one’s
name. Poverty is widely understood as absolute poverty, to the
exclusion of several other types of poverty, which are essential to be
eliminated for real empowerment for a life with dignity and options.
By an expanded definition of both these terms, the demographic
profile of people will show far more numbers under these categories
than are reflected in poverty statistics, as these are based on absolute
poverty and minimal literacy.
1.2 The prevalence of high level of political violence resulting in
serious subversion of individual freedom, partisan decisions, and
opaque governance are other serious impediments to good
governance through democracy. It is against the background of the
above conditions that are widely prevalent in India, with its
aggravated presence in Rural India, that this paper seeks to analyse
the Governance and Management aspects of the Three Tier Credit
Cooperatives, constituted of the Primary Agricultural Cooperative
Societies, the District Central Cooperatives and the State Cooperative
Banks. The fact that large parts of rural India suffer from acute
illiteracy and poverty, under the wider definition cast shadow over
the effectiveness of democratic organization of cooperatives,
particularly since ownership (equity stake holding) and membership
are co-terminus. Even against adverse socio-economic conditions
operating, the basic tenet of cooperatives is that they are democratic
institutions. So, if we have to sustain cooperatives, they have to be
sustained as such. This leads us to a debate on the constraints that
inhibit democratic governance in these institutions and to the options
that need to be exercised to ensure effective democracy. The
argument is that the mere choice of elections being the method for
choosing the governing bodies should not be considered as the end
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all of good democratic process. The active governance and economic pursuit, but based on certain
management should adequately and substantially respond to the four basic principles and values. These
basic processes of good governance, i.e. transparency, accountability, essentially include idea of self help,
participation and predictability. Before proceeding further, let us also mutual aid and defence of the poor
look at some of the basics on cooperation and how the three tier against exploitation.
cooperative structure came into being in India.
2.4 Why co-operate ?
1.3 The impact of the near absence of sound management, business
2.4.1 Economic Reason:
model and systems adequate to support the volume and spread of
business among large numbers of the cooperative credit institutions Unequal Distribution of Wealth
in India need no elaboration. These institutions are beset with several and Income
debilitating issues like lack of professional management, political The complexities of social and economic
interference, low volumes of business, small range of banking life of man has passed through
products, high level of NPA, high transaction costs, high cost of innumerous and significant,
funds with the cost escalating at each higher tier, dual control by transformations. During early stages
state government and banking laws and regulator, poor internal of human civilization, the terms for
control mechanisms, absence of uniform procedures, manuals,
survival was largely favourable with
protocols etc,. The institutions also has very low level of technology
small population size, less wants and
awareness, access and use are overstaffed resulting in low staff
an abundance of resources. The
productivity. Some of the other ills include lack of accounting
evolution of human civilization and
standards, lack of transparency, poor quality of audit, poor quality
societal transformations saw far
of credit appraisal; near absence of appraisal of credit worthiness
reaching changes in the way of life and
of borrowers.
organization of societ y. The
2. Basics of Cooperation complexities of modern day life brought
2.1 The cooperative system of organization evolved as people’s in its wake heavy inter dependence
organisations , based on their aspirations, principles of voluntarism among people and societies. These
and was bonded on affinity groupings in most part of the world. processes of transformation included
However, the Indian experiment with cooperatives started as a top- the increase in wants, the exchange of
down, statute dictated model in 1904, as a government’s response produces among people, the advent of
to meet difficult situations. Thus, historically the entire organisation division of labour, improved methods of
of cooperatives, particularly Credit Cooperatives in India, did not follow production, the evolution of the money
the basic principles nor did it stem from the desire of the people to economy etc.
organize themselves for common good. The government functionaries
2.4.2 The money economy and the
of those days were given targets to form cooperative institutions,
transformed societies with well defined
and large numbers of cooperatives “got formed”.
production systems brought about the
2.2 This process was facilitated by government participation in equity inequalities of income and wealth
and substantial control of the government officials in the management among people. Under the concept of
of the “cooperative” institutions. To further our appreciation of how the evolving economic systems, the
cooperatives were formed in India, let us look at what cooperation control and ownership of the various
meant in the historic context of its evolution and the evolution of
factors of production, i.e. land, labour
cooperatives in India.
and capital led to growing inequities in
2.3 What is cooperation ? the distribution of income and the
accumulation of wealth. Over the
Cooperation in its literal sense means working together. However, in
centuries, the unequal distribution has
a technical sense, the term means working together for some

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widened the gulf between the rich and
the poor. Such economic divide
aggravates the social divides and add
to the already existing divisions in the
society. The study of the economic and
social divide is the subject matter for a
detailed study in itself. The short point
that is sought to be made here is that
the existence of various degrees of
relatively disadvantaged sections of the
people brings into focus the need for
cooperation for economic reasons.
2.5 The Social Reason : Fight
Exploitative Practices
2.5.1 As stated earlier, the concept of
cooperation also deals with mutual aid
and defenses against exploitation, apart
from core economic reasons. While a
major focus indeed is the availability of
collective power that will shield against
various exploitative tendencies in
emerging economic scenario, it also
helps to assist in various personal and
social matters of importance.
2.5.2 Stephen Covey in his book, “The
7 habits of highly effective people” deals
with the concept of maturit y
continuance. Briefly stated maturity
continuance deals with the progression
of the individual from a stage in life of
dependence to a stage of independence
and thereafter to a stage of
interdependence. The larger part of
adult life exists in the Interdependence
paradigm. The values of cooperative
movement fuses well with this concept.
In fact, cooperative movement, which
can be termed as a people’s movement
on a generic sense, seeks to unite the
economic expediencies as well as social
compulsions, more particularly among
the disadvantaged and the needy.
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2.6 Evolution of Cooperative Credit Movement
2.6.1 Europe is considered the cradle of cooperative movement in
the world. It is interesting to note that the cooperative movement in
Europe started as a response to various types of disadvantages and
exploitation suffered by different sections of the society. In Britain,
it was the post Industrial Revolution scenario that propelled the
experimentations with the concepts of cooperation. The credit for
starting the cooperative movement in Britain goes to Robert Owen
who involved workers in the reorganisation of industries.
2.6.2 Robert Owen, of Britain and Charles Fourier of France called
for a new economic system based on cooperation and collective
ownership. Elsewhere in Europe, The origins of cooperative credit
systems is considered to have taken roots in Germany. Once again
it was famine, poverty, exploitation and indebtedness that fueled the
beginnings of cooperative movement there. Poorer farmers and
labourers in Germany were heavily in debt and, were being exploited
by money lenders. The situation was reportedly so bad that almost
the entire farmland in Germany was encumbered with debt during
the 1800s. The situation worsened even further due to famines. It
is against this backdrop that the movement started in Germany.
F.W.Raiffeisen and Franz Shulze are pioneering personalities in the
credit cooperative movement.
2.7 The Cooperative Movement in India
2.7.1 The cooperative movement in India also can be traced to the
problems faced by the rural society. During the late 1800s, large
sections of farmers in India were under the clutches of moneylenders
who charged usurious interest rates. Their acute poverty was thus
worsened by indebtedness. The result was growing unrest among
the farmers leading to agrarian disturbances.
2.7.2 India also faced a very large number of famines during this
period. During the period 1858 to 1908, the country suffered 20
major famines, further aggravating the already precarious economic
conditions of the poor farmers.
2.7.3 Several initiatives were taken by the Government of the day
under these circumstances. The Deccan agrarian struggle against
the exploitation by the moneylenders led to the enactment of the
Taccavi legislation. The Northern India Taccavi Loan Act, 1875, The
Land Improvement Loans Act 1883, Agriculturist Loans Act 1884
were enacted to mitigate the problems of the farmers and to make
credit at reasonable cost available to farmers.
2.7.4 Another initiative was taken by the Madras government when
Frederick Nicholson was appointed in 1895 to study the possibilities
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of starting land banks so as to help combat rural indebtedness. During 2.7.8 As is evident from the brief sketch
the contemporary period, the famine Commission in 1898 and Duper- of history of cooperatives given above,
nex in his book “People’s Bank for Northern India” in 1900 argued the movement lacked most of the
for cooperation among Indian farmers to insulate them from many participativ e element in it, and
of their problems. Lord Curzon followed the famine commissions therefore, can be logically concluded
recommendations and appointed the Edward Law Committee in 1901 that it lacks the intrinsic strengths of
and the first Cooperative Societies Act was passed in 1904. The peoples movement.
societies enjoyed state patronage by way of exemption from income 3. Divergence from Classical
tax, stamp duty, registration fee and the government also provided Schools of Thought on
interest free loans for limited period for new societies. With the Cooperation
expansion of credit societies, the people’s aspirations to form non-
3.1 It will also be seen that there is
credit cooperatives grew and the second cooperative societies Act of
substantial divergence in the Indian
1912 gave recognition to large number of cooperative entities like
system of cooperatives from the main
producers and marketing cooperative societies, cooperative unions,
schools of thought on cooperation, as
central cooperative banks and provincial banks.
discussed below :
2.7.5 The Reform Act was passed in 1919 and cooperation was
a. The Cooperative Enterprise
made a Provincial subject and from these beginnings to this day, it
School
has remained a State subject. Several provincial acts were passed
This school looks at cooperatives as a
and some of the early acts are the cooperative societies act of Bombay
voluntary economic unit organized,
of 1925, of Madras in 1932 and Orissa in 1935. All these acts followed
capitalized and run by members. The
the basic fabric of the 1912 act.
main objective of cooperatives is seen
2.7.6 During this period, India suffered the Great Depression (1929) as the advancement of member’s
and prices of agricul tural produces fell and substantially affected economic interests and the maintaning
the income of farmers. This lead to inevitable weakening of the sustainability of small producers
movement. The Provinces and States instituted various committees through pooling of resources, thus
to look into the various issues. In 1937, the then newly formed enjoying economies of scale.
Reserve Bank of India also prepared a report suggesting ways and
b. The Cooperative Commonwealth
means to resurrect the movement. These studies lead to a period of
School
consolidation, rehabilitation and rectification and increased official
The proponents of the commonwealth
controls. With changing fortunes of the farmers from 1935, the
school sought to both improve the
movement also started to flourish.
economic position of the members as
2.7.7 The world war saw the government drawing up reconstruction envisaged by the enterprise school, but
plans and these plans also looked at cooperative movement as an it also sa w cooperatives as an
important organizational mechanism to make democratic planning alternative to competitive, capitalistic
successful. The Cooperative Planning Committee was appointed in system, based on mutual cooperation.
1945, which recommended expansion of coverage of cooperative
c. The Socialist Cooperative
societies to 50% of villages and 30% of rural population, encouraging
Enterprise School
non-credit cooperatives, formation of multipurpose cooperative
societies etc. However, the implementation of these recommendations This school believed in more radical

was impeded by the partition of the country. Once again the outlook for cooperative movement. The
cooperatives were seen as economic
movement took a hit and the consolidation and expansion phase did
and social organizations to promote,
not take off as expected.

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safeguard and realize the interests and
aspirations of the working class, with
the ultimate aim of transformation into
communism.
3.2 These schools of thought have been
briefly described here to bring forth the
fact that in India the evolution/genesis,
organizing, capitalizing and
management did not conform to any of
these classical schools, as far as the
three-tier cooperative credit movement
is concerned.
4. Good Governance and
the Cooperative Credit
Structure
4.1 Having seen the adversities arising
out of both the socio-economic and
political situation in which the
cooperative credit institutions perform
and the artificial nature of the
movement’s evolution, it becomes more
and more evident that the challenges
to bring in good governance into the
system is indeed daunting.
4.2 On the one hand it is necessary to
ensure transparency and accountability
about the process of governance in the
cooperative credit structure. On the other
hand it is essential to ensure effective
participation of members in the decision-
making process and to establish sound
systems and procedures that will not get
perverted by partisan considerations.
4.3 In this context, it is interesting to
consider the ten principles of corporate
governance suggested by the Australian
Stock Exchange Corporate Governance
Council and discuss how these principles
can be modified to improve the
governance of cooperative credit system
in India.
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4.4 Strong Management and Oversight
4.4.1 In the case of the cooperative credit system this hold several
complexities. What is empirically seen in India is that there is lack of
convincing evidence of modern management practices in most of the
cooperative institutions in the three tier structure. However, there is
no alternative but to increase accountability of the board to the
members for the quality of decisions that they take. This can be
achieved by providing white-paper information on the major losses
and poor business decisions that have been taken during the year to
the members. There is an argument that exposition of frauds, poor
decisions and losses of a credit institution/bank will jeopardise its
good will and public confidence. But this tenet has ruled too long
and subverted the concept of transparency.
4.4.2 The full impact of management accountability can be ensured
only when supported by massive member education drives. There is
also the need to have continuing member involvement programmes
in the management and operations of the cooperatives. Each member
of the cooperative institution need to be made aware that s/he has a
stake in the working of the institution. There should be a hope to
derive tangible benefit from the institution by way of lesser interest
rates on loans, dividends on shares and bonus for involving in the
operations. The board members also should receive induction training,
top class management training and continuous training on various
operational, regulatory and managerial aspects.
4.5 Effective Composition of the Board
4.5.1 The board of the cooperatives are made up of its members
who have stakes in the operations of the institution. They are either
borrowers or depositors in the institution. Hence, within the flexibility
available, it is desirable if majority of the board of directors are
derived from the providers of funds, rather than the users of funds.
It is unfortunately seen that the boards of the three tier cooperative
structure is skewed in favour of those who borrow rather than who
own the liabilities in these societies / banks. Similarly there is an
urgent need to liquidate the participation of the government in both
equity and governance. If the liquidation of the government
contribution is impractical, the government can rightfully ask for
earnings from its investments in the cooperatives, instead of taking
part in their management. In such eventuality it is desirable, perhaps,
to convert the government’s equity participation as soft loan and
sub-ordinate debts at the earliest.
4.6 Ethical and Responsible decision Making
4.6.1 There must be information available to the general members
on the critical decisions taken by the management including decisions
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on major loans/advances granted. The members must be appraised cooperative institution and to restrict
of the risk factors that were considered by the board/management the extent of risk that is taken.
and the mitigants that were deployed. Any significant interest of 4.11 Encourage Enhanced
any board member in any of the decisions taken should be made Performance by the Board
public.
4.11.1 Since the board will be composed
4.7 Integrity in Financial Reporting through democratic representation,
4.7.1 The cooperative system needs to evolve a self regulatory there is the need to provide a mid-tier
mechanism that will independently verify that the financial reporting structure of professionals who will
by these institutions are authentic and according to well recognized provide information and analysis that

norms and standards of accounting. There is an urgent need to is needed to arrive at sound decisions

establish a “Uniform Accounting Standards for Cooperative Financial and to efficiently discharge the

Institutions” in India based on the principles of sound and standard responsibilities.

accounting principles, transparency, disclosures and comparability. 4.12 Fair and Responsible
4.8 Timely and Balanced Disclosure Remuneration
4.12.1 The board members need to be
4.8.1 Key aspects in the functioning of the cooperative credit
provided fair and reasonable
institutions must be disclosed to members, regulators, supervisors,
remuneration for their participation in
employees and the general public. The true financial health of the
the management of the institution. This
institution, the efforts being taken to ensure safety of funds, the
also devolve the moral responsibility on
systems available to ensure good management etc. should be available
them to increase the soundness of their
on the public domain. The regulatory and supervisory advisory and
decisions and efficiency of performance.
impositions should be made public, particularly to members with
specific explanations as to the reasons for their disfavour and the 4.13 Recognise the legitimate
steps taken to rectify in the short run and system improvements interests of stakeholders
being brought on to avoid recurrence in the long run. 4.13.1 The cooper ative credit
4.9 Respect the Rights of the Shareholders institutions must have a code of conduct
and an internal system to monitor
4.9.1 The members need to be provided with ready access to
adherence. The social purposes for
information, in an understandable form. As large numbers of share
which the cooperative exist should be
holders in the cooperative credit system are illiterate or semi literate,
widely advertised and the convergence
there is a need for advocacy groups of educated members who may
of the operations to these purposes,
strive to access information and disseminate the same among
values and principles should be openly
members. The member education programmes need to focus also
discussed.
on educating shareholders about their rights and roles. The concept
of “nominal membership” need to be revisited as the basic principles
5. Conclusion
of true coopertivism do not provide for unequal member rights or 5.1 As discussed above, the three tier
roles. cooperatives credit system in India did
not evolve as a people’s movement and
4.10 Recognition and Management of Risk
till date is besotted with ills of a
4.10.1 The cooperative credit institutions need to develop a system superimposed structure. The
of understanding, documenting and managing risks to which each cooperative system is also set in an
respective institution is exposed to. This should find a place in their environment which is not the best fit
annual reports and member education programmes. The members for informed democratic processes. It
should have opportunity to know the risks that are taken by their is therefore necessary to seriously

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review the process of governance in Reference

these institutions and the challenge is
1.
to bring in the quality of the basic
principles of cooperation into it. The 2.
redemption, therefore lies in mass scale
member education programmes, 3.
strengthening and reengineering of the
Cooperative Movement in India by G R Madan
Task Force on Revival of Cooperative Credit Institutions (2005)
Chairman : A. Vaidyanathan
Decentralisation and Local Governance by Debi Prasad Mishra ( Paper
presented in the Silver Jubilee Symposium on Governance in

management processes in the existing Development: Issues, Challenges and Strategies at IRMA, 2004)

cooperatives, ensuring transparency, 4. Governance and Cooperatives : Set of guidelines on Principles of Good
responsible governance and ensuring Corporate Governance and Best Practice Recommendations by the

zero equity participation by Australian Stock Exchange.(2003). Website: http://www.australia.coop/

government. governance.htm

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