|
|||
|
|
|||
|
COVER STORY |
COOPERATIVES With weak regulations and ineffective monitoring, financial institutions, particularly cooperatives, are collapsing one after another, creating panic among the people. Operators of over half a dozen cooperatives have closed shop and fled with depositors’ money. The government does not have laws to recover money from the promoters. Until officials come out with a strong regulatory and monitoring system, more promoters could escape with the hard-earned money of poor and vulnerable people. By KESHAB POUDEL Bhimsen Sapkota, 38, a vegetable vendor at Koteshwor, never imagined that the promoters of the cooperative where he had deposited Rs. 75,000 (US$ 100) would vanish one fine morning. On the afternoon of May 10, 2001, Sapkota got the bad news. Rumors that the promoters of the cooperative had fled, taking along more than Rs 4 million belonging to 200 depositors including local vendors, laborers and shopkeepers, spread like wildfire.
Devastated by the disclosure, Sapkota, along with some other depositors, rushed to the office of cooperative hoping that they might be able to catch someone. Others rushed to the Koteshwor police station to file complaints. By the time Sapkota finally registered his complaint, the promoters must have had more than enough time to vanish without a trace. Angered by the deceit, some depositors manhandled the employees of the cooperative and ransacked the office building. Despite the public pressure, police are yet to arrest any of the cooperative’s promoters. Desperate to get back their money, some depositors are making their own efforts to get hold of the culprits.Depositors at Peace Nepal Multiple Cooperative at Samakhusi have a similar tale to tell. Some of the promoters fled last week, taking away more than Rs 25 million in deposits. Although, in this case, the depositors found out about the disappearance of one of the promoters within hours, it was still too late to seize the culprit. Soon after the closure of its head office, a branch office of Peace Nepal Multiple Cooperative closed down in the headquarters of Lamjung district in western Nepal, taking away Rs 1.1 million. The branch office collected deposits of Rs 2.2 million and had invested Rs1.1 million. Twenty-three depositors filed a written complaint with the chief district officers, the Kathmandu district police and the government’s Department of Cooperatives demanding urgent action.
There is no record of how much money cooperatives have deposited over the last ten years and how much they have invested in different sectors of the economy. However, news of cooperative promoters running away with huge amounts of deposits has been coming out regularly. No one knows how many culprits have been caught and sent to jail or how many depositors have been able to recover their money. Worse, few have a clue about the nature of the charges that should be framed even if the promoters are arrested. The government is yet to show seriousness in formulating laws to check the misuse of the cooperatives and finance companies that have mushroomed in the capital and other cities of the country over the past decade. Some believe that those who let these people open shop in the first place should be held accountable and punished. "The government has to arrest those who issued the license to the cooperatives, because they are solely responsible for observing the performance of the cooperatives," says a lawyer. But officials of the Department of Cooperatives have their own grievances to share. "When we try to delay the registration of a cooperative, the promoters file a case in court seeking immediate action," says the registrar of the department. "We don’t have the authority to punish those who misuse the money of depositors," he adds. Department officials fear that the situation is going to get worse in the days ahead when most deposits begin to mature and the cooperatives have to return the money to the owners. Most of the cooperatives have collected savings on promises of doubling the principal in five years and others pledge annual interest rates as high as 24 percent. As the demand for loans is comparatively low, the cooperatives are barely in a position to return the original deposits. Because of frequent strikes and shutdowns and lingering political instability, even small borrowers are unable to pay back their loans.
Cooperatives collect money every day but they do not have places to invest it. In these circumstances, it is difficult to understand how they expect to pay the depositors the high interest rates they have promised. Against such odds, many cooperative promoters find an easy exit in vanishing with the money they have. "Over the next two or three years, we will see many more promoters doing the vanishing act," says an official at the Department of Cooperatives. "The department must have certain regulatory powers to check the misuse of public money." Although cooperatives in the agriculture and dairy sector are performing quite well, the major problems arise with the roughly 1,500 cooperatives that are involved in banking transactions. The law does not allow cooperatives to open branch offices, but many are doing just that. A branch office of another cooperative recently closed down in Biratnagar, taking away Rs. 2 million in deposits. Despite this brazen violation of the law, no one seems to have shown the initiative to act against such promoters.
Established four years ago, the cooperative in Koteshwor collected savings from the vegetable vendors, shoe menders and waged laborers who deposited their daily saving ranging from Rs 25 (33 cents) to Rs 300 ($4). For Sapkota, it took more than two years to save Rs 75,000. "God saved me because I had withdrawn Rs 50,000 just the previous day," said Sapkota. "We have filed a complaint under the charges of fraud at the police station." Legal ambiguities have complicated recovery efforts. Loan is considered as a civil liability and is not a crime. Cheating and default are different crimes. If there is a criminal part, then police can file a case under criminal fraud. Because of the lack of appropriate laws, police file almost all default cases under the criminal law governing cases like fraud and cheating. There is another important distinction. Corporate crime is different than individual crime. It is very complicated in nature. Deposits were made in trust of promoters but not employees. So for any kind of misuse of money, the cooperative society should be held accountable. When the transaction is made between the cooperatives and individuals, the promoters should be penalized. A cooperative is a legal entity and has to take action against employees for any misappropriation. A cooperative is an institution not an individual. "Police register cases under fraud charges because it is difficult to register them under the cooperative crime," says a government attorney. In most cases, the culprits are charged under the Fraud Act. Cooperatives are authorized to accumulate savings and distribute credit in small areas. As soon as cooperatives receive permission, they start functioning as a bank or financial institution, which require more expertise. According to the Department of Cooperatives, there are 6,000 cooperatives registered in the country of which 1,500 are working as banks.
Although it is a new phenomenon, promoters have cheated a large number of depositors and members. Some promoters flee with a few million rupees while others run away with tens of millions. Whatever the amount involved, the victims are mostly people belonging to the low strata of the population. According to police records, more than half a dozen cooperative promoters fled the country last week alone, taking away more than Rs. 50 million or ($ 666,000) in deposits. Following the restoration of democracy, the liberalization of the political system was accompanied by the opening up of the economic system. The government started to loosen restrictions in many sectors. The banking, financial and cooperatives sectors were opened to the private sector. While the disappearance of a large number of cooperative promoters has set a bleak scenario, some cooperatives are doing encouraging work. Nava Chittiz Cooperative is one such organization. "The business of cooperatives depends on how credible the promoters are and how they handle things," said Bivuti Raj Pandey, managing director of Nava Chittiz. Positive Aspects The opening of cooperatives has provided people in remote areas easy access to credit and other banking facilities. Cooperatives also open up the opportunity to generate resources from the local community. The Cooperatives Act of 1991 was brought out with the objective to allow farmers, laborers, low-wage workers, the unemployed and landless peasants to set up an organization to collect deposits and mobilize them for local benefit. Because of the loopholes in the act, many promoters misused the concept of cooperatives. According to the act, a cooperative is known as an institution set up by at least 25 individuals or institutions with an objective of providing social and economic services. The Department of Cooperatives has been given full authority for registration with deposits of Rs 100. But cooperatives have started to collect unlimited amounts. According to the act, the members of a cooperative must be from the local area and have a share in it. Contrary to that provision, many outsiders are running cooperatives where accountability and social responsibility is totally lacking. Registration Procedure Since the act came into force, more than 6,000 cooperatives have been registered in the district cooperative offices in different parts of the country. According to the act, a district cooperative office can register the cooperative. Many say this is where promoters can misuse their name. As the department does not have adequate work force, nobody knows the fate of cooperatives once they have been licensed. The problem with most of the cooperatives is that they are not operated by the local people, thereby raising the chance of misuse of funds. In the name of economic freedom, all cooperatives enjoy total freedom in the accumulation of deposits and in investing them. What then are the roles of the Nepal Rastra Bank and the Department of Cooperatives? "It is not our duty to supervise the cooperatives; that’s the duty of the cooperatives," says Ram Babu Panta, deputy governor of Nepal Rastra Bank. Most of the shareholders and promoters of cooperatives do not know what their roles are and are not trained in accumulating deposits and investing money in important sectors. According to Clause 34 of the Cooperatives Act, every institution has to present its audit report and transactions annually along with savings distribution policy and plan, name of promoters and remaining tenure, the date of the general council and other details presented by the registrar. However, only a small number of cooperatives make available their annual transactions and financial reports to the district office. Because of low number of employees at the district office, they do not find time to visit the cooperative sites. "How can seven employees observe 1,500 cooperatives in and around athmandu district," asks a senior employee. "In most cases, cooperatives are running out of a small rented room. The government must provide us with adequate manpower," he adds. Clauses 35 and 36 of the act authorize the registrar to monitor and check the transactions of cooperatives. Strangely, cooperatives have no record of doing so in the last ten years. Even the Department of Cooperatives does not have a proper file-keeping system. Under Clause 26, a cooperative can begin banking activities after obtaining permission from the Nepal Rastra Bank, but a large number of cooperatives are running such operations without having acquired such permission. "Nepal Rastra Bank does not want to become involved in this dirty transaction," says a senior bank official. "Even with a strong monitoring mechanisms, many financial institutions are still collapsing," he adds. A cooperative and association can issue loans to its members and collect savings but it cannot go beyond the prescribed limits. "The cooperative cannot extend loans under the title of hire-purchase, which requires more money and expertise," says another senior NRB official. "Unfortunately, some cooperatives are issuing loans under this very title," he adds. Although the registrar can dissolve and take action against the promoters of cooperatives, he can also ask colleagues to monitor how the organization is working. If promoters misuse savings and deposits, the amount can be recovered by confiscating their personal property. However, recovering money from promoters is difficult because it involves a lengthy process. In many cooperatives, disputes between promoters begin soon after they start accumulating savings. The situation of finance companies is similar, but these organizations operate under the supervision of Nepal Rastra Bank. Therefore, the possibility of the depositors losing their money is very low. Nepal Rastra Bank has registered 48 financial institutions, which collected Rs. 11 billion in deposits and invested Rs 10 billion. For a country like Nepal, cooperatives are necessary to collect deposits and provide small loans to the local community, especially where other financial institutions hesitate to venture into. A major problem is that most cooperatives have abandoned the original vision of common benefit and are operating as banks in urban areas. Despite the government’s stated policy, no one is willing to go to rural areas where it is difficult to collect deposits. "As a large number of cooperative promoters are fleeing, the government has to stop issuing new license until it acquires firm monitoring capabilities," says Dr. Raghab Dhoj Panta, a former member of the National Planning Commission. At a time when such a large number of cooperatives are collecting huge amounts in deposits, there should be complete transparency in the way they collect and invest their money. Without an effective mechanism to monitor the activities of the cooperatives, the hard-earned savings of millions of country’s poor would continue to remain under threat. ‘We Don’t Have The Authority To Regulate’ HARI PRASAD NEPAL, registrar of the Department of Cooperatives, sees the need for a firm regulatory mechanism to check the misuse of cooperatives. He spoke to SPOTLIGHT at his office on various issues related to the problems of cooperatives. Excerpts: How do you see the problems faced by the cooperatives? There are about 7,000 cooperatives working in Nepal to mobilize local resources for the benefit of the local community. There is a need for strong regulations to regularize micro-credit institutions, regardless of whether they are run by NGOs or other organizations. Cooperatives are mostly based in the village and community. However, in our country, cooperatives are not member, village and community based. Cooperatives accept deposits from non-members. The Cooperative Act 1992 also stresses the need to run the cooperative within its membership. The act clearly specifies the condition that the cooperative can extend loans to its members and accept deposits from them. The act incorporated the provision that the cooperative would require the permission of the Nepal Rastra Bank to work as a bank. In the early days, the cooperatives started banking functions without obtaining permission from the Nepal Rastra Bank. But nowadays, the central bank has not issued such permission to cooperatives. Cooperatives have collected huge amounts of money from non-members because of the high flow of money in the market. When cooperatives started to accumulate money from non-members, they should have abided by certain financial rules in the areas of credit limits and liquidity. The institutions that deposit public money should follow prudent norms. Unfortunately, no one has done that. The present chaotic situation in the cooperatives sector is the result of their failure to abide by financial rules. Cooperatives are closing down because of lack of liquidity, high administrative costs and bad loans. The problem with the cooperatives is that they collect the deposit from non-members and offer loans to members. This means the cooperatives collect the deposit from unlimited members and offer loans to limited numbers. When limited numbers of client do not pay back their loans, the cooperatives are unable to refund money to depositors. After the amendment, the cooperatives cannot collect deposits from outside their membership and face limitations on banking transactions. What will the cooperatives that have collected deposits from non-members do now? Cooperatives will have to refund the deposits they collected from non-members by November 2001. There also need to regularize their transactions. For newly established cooperatives, we can enforce this new provision. However, we cannot do anything to cooperatives that have already collected huge amounts of deposits. The Department of Cooperatives can now close down cooperatives or impose a Rs 1,500 fine if they do not abide by the rules. Unlike Nepal Rastra Bank, which can take strong action against financial institutions and intervene if necessary, the Department of Cooperative cannot do anything beyond imposing the Rs 1,500 fine. The problem in the cooperatives sector has set in because they started functioning as a financial institution. Cooperatives are small but they are over ambitious. The challenge lies in monitoring and evaluation, but we cannot do this within limited manpower. There are many successful cooperatives run honestly by its promoters. The basic problem is dishonesty. Registering cooperatives does not require much effort as everyone can open one by just depositing Rs 100 each from 25 individuals. The basic problem is the dishonesty of some of the promoters. We are trying to find a solution to the current problems. We are seeking the support of Nepal Rastra Bank to regularize the cooperatives. What efforts are you making to check the misuse of cooperatives? Our staff are on house-to-house visits to direct the cooperatives. We have also asked the chief district officers to take action against cooperative promoters who disappear with the public money. In many districts, the CDOs have arrested some promoters on charges of fraud. These actions are effective. In Kathmandu valley, it is very difficult to do the same. In a big urban area, we need to have another approach. Only cooperatives based in Kathmandu are facing problems. Outsiders run most of the cooperatives that have closed down. Community-managed cooperatives are bringing good results. We have to discourage outsiders from opening cooperatives. We are trying to develop community- and member-based cooperatives. We want to see cooperatives governed by the local people. We don’t’ want to issue licenses to people who come from beyond the locality. We don’t have regulatory power. There is no room for taking action. What conditions do cooperatives need to fulfil in order to operate as banks? Cooperatives have unlimited access to savings and are tax-free. Now they have to pay taxes in transactions. Most of the cooperatives based in Kathmandu also have branch offices outside the valley. In such situation, no one can supervise the activities of such bodies. Since last year, we have not given permission to open branches. We want cooperatives to focus on the local community. Moreover, we need to have Cooperative Bank Act or Credit Union Act to permit cooperatives to start banking activities. A general Cooperatives Act cannot govern cooperatives that operate as big financial institutions. We need to have a separate act. ‘People Are Losing Faith In Cooperatives’ BIVUTI RAJ PANDEY
BIVUTI RAJ PANDEY is a well-known former bureaucrat. He is now executive chairman of New Horizon Cooperatives Limited. Pandey spoke to SPOTLIGHT on various issues related to the problems of the cooperatives? Last year you have mentioned to us the possibility of major problems in the cooperatives sector. How do you look at the situation today? Last year I saw the possibility of many cooperatives crashing. I have not seen any kind of honesty on the part of promoters. Although there has been a mushrooming growth of cooperatives, honesty is clearly lacking. The intention of the cooperatives is wrong as everyone want to flee after accumulating public money. The promoters of more than half a dozen cooperatives have already fled. If they are really honest, they don’t have to flee. The cooperative might not able to collect loans or may have other problems, but everyone want to escape by taking public money. The government, too, has failed to identify these people. Before issuing licenses to the cooperatives, the government must go through the antecedents of such individuals. No one deposits money in cooperatives unless they know the promoters. The Department of Cooperatives registers these bodies as soon as 25 individual apply with Rs 2,500 deposits. What should be done to control cooperatives? This is very difficult to answer. I don’t visualize it. People come to me asking what guarantees I can give to depositors? People are losing faith in cooperatives. We need to develop their credibility. There is a rumor that more than 15 cooperatives are on the verge of collapse. It is the responsibility of the Department of Cooperatives to rescue such cooperatives and save public money. At least the government has to save the public money. The government has to encourage the cooperatives to collect the bad loans.First, the cooperatives should not be allowed to open branches. When the central office is not running properly how can they be allowed to open branch offices. We need to have people with integrity. Our cooperatives are in bad position. Amid this crisis, how do you see your future? We are surviving on our credibility and good will. Individual credibility determines the future of a cooperative. Although the situation is also not good, we are returning money to depositors when they ask for it. There are also problems in collect loans, as people do not want to return it. So many lenders are not paying interest. We have run the institution for the last seven years. How do you see the role of the Department of Cooperatives? The department needs to play a more active role. Some cooperatives are facing problems of bad loans. The government must cooperate with the cooperatives to refund the money. They have also followed a positive role. We understand that the government does not have sufficient resources, but it must take certain responsibility. The cooperatives do not have any guardians. We have more than Rs 10 million in non-assets. We have auctioned property worth of Rs 4 million. It is very difficult to recover the loans. If the department works as a facilitator, the situation may have change. How have these problems emerged? There are so many bad elements within the cooperatives today. Earlier, there were a limited number of organizations that ran very successfully. As we are based on membership, we cannot defy the demand of the members. There are certain cooperatives that do not have specialized manpower. The government has to specify the criteria for loan flow. There has to be some guidelines. I don’t get any types of guidelines from the department. We need to have an efficient control mechanism. In the name of liberalization, everything cannot be opened. Cooperatives are mushrooming like momo restaurants and beauty parlors. How many cooperatives does Kathmandu need? The department must make a decision. |
Send your feedback to the
editor: spotligh@mos.com.np |
