What do we know about credit

cooperatives in India and its role

in the microfinance landscape?

Regulatory environment and institutional design of credit

cooperatives in Maharashtra and Andhra Pradesh
Frida Ruiz
 What does theory say about coop.?

9 Cooperatives and ROSCAS are roots of microfinance

9 Collect fund from savers and allocate them to borrowers
9 Members do not have to wait turn to borrow
9 Borrowers and savers are shareholders: member-owned and member-
managed
9 Social sanctions in place: belong to same community + own shares
9 Incentives to monitor and enforce contracts are linked to institutional
design. Motivation driven by ownership (Morduch and Armendáriz -05 & Barnerjee, Besley
and Ginnane-94)

9 Role in mobilizing local deposits, peer monitoring and addressing risk

 Antecedents of legal environment

9 Introduced in India by the British to fight Mahajan in rural areas

9 Cooperative Credit Societies Act 1904 (Raiffeisen´s model)
9 Cooperative Societies Act 1912 new types: multi purpose societies
9 Development of societies in Bombay and Madras due to the mortgage right
in land.
9 Reforms Act 1919: cooperation became a provincial subject.
9 Organization and control under the Register of Cooperative
9 Bombay pass coop societies Act 1925, Madras 1932, Bihar & Orissa 1935.
9 Central Bank in 1935. Took up program to provide cheap finance for
agriculture for production purposes
 Proper environment?
9 Started to provide cheap credit to farmer due to the vital position of
agriculture in the economy and avoid more famines
9 Cooperative movement in India has not sprung up from people.
Initiated by gov. to solve rural indebtedness (tool)
9 Not on voluntary efforts of people to help themselves but on the gov.
support.
9 State intervention and control (by register of cooperatives and gov. share)
9 Lack of managerial education
9 Emphasis on organizing village institution not based on mutual help
nor on spirit of cooperation
 Regulatory environment in Maharashtra

9 3 tier-structure: State Cooperative Banks, District Cooperatives Banks, Primary

Agricultural Credit Societies (PACS). Other cooperatives. Dual control RBI and
Register. Complex structure!

9 Maharashtra Cooperative Societies Act 1960. Needs of traders and urban

population covered by urban cooperative banks
9 Regulation allows high degree of state intervention (state share capital)
9 Control by register of cooperatives societies in decision-making (burden)
9 Political interference (business, management)
9 Predominant control in Board of Directors
9 Weavers from the state for loan repayments
9 Dependence on the state: fail to satisfy interest of members and motivation
 Does theory work in this context?

9 Incentives of credit coop design are distorted Apparently No, third party
9 High levels of non-performing assets, erosion distorts incentives of the
of deposits and losses (many PACS losses) pure institutional design.

9 Institutions are seen as government

institutions not member-owned (general
perception)
9 Whose interest are they operating?
9 Social sanctions weaker: belong to same
community but own institution?
9 Weak incentives to monitor and enforce
contracts Limited role in mobilizing
local deposits, peer
9 Motivation not driven by sense of ownership
monitoring and addressing
9 No incentives for savings in weak institution risk.
 Where is the microfinance space?

9 Hindustand Coop. Bank begins to work with ICICI bank (28/53).

9 Restrictions from the regulator (ROC)
9 Not borrowing from commercial banks – permission (bribes?)
9 Regulation on interest rate: ceiling on spread (3%) from gov. funds.
9 Credit less than Rs. 50,000 are microcredit. JLG (3-5). Daily recovery (Non
recovery 9% in cooperative).
9 Microfinance clients become members (share in capital).
9 Urban areas of Mumbai– income generation and consumption
9 Leverage knowledge of the area. Already working in urban microfinance?
9 How institutional design encourages peer monitoring and social sanction?
9 Needed changes to make urban cooperatives to go to grassroots?
 Regulatory environment in AP
9 AP Cooperative Societies Act 1964.
9 Same issues: state control and political interference, government
empowered to rule, restrictions in investments and mobilization of
funds.
9 Liberal Act 1995 creates Mutually Aided Cooperatives Societies
9 Other states followed but Maharashtra
9 Predominance of cooperation principles, reduced role of register
9 Government no shareholder, no presence in Board of Directors
9 Member- owned & member-controlled, autonomy in affairs byelaws
9 More liberty in financial transactions : savings mobilization from
members and credits to members. No constraints as NGO-MFIs
 Where is the microfinance space?

9 18k MACS (3k converted), 41% are thrift cooperatives

(microfinance) and 18% dairy & 11 PACS converted.
9 SHG federated under the legal form of MACS (Mahila Banks).
9 Coop. members are individuals. Target group of ICICI
9 Share contribution- ownership by members
9 Woman’s Thrift Cooperatives and Men’s Thrift Cooperatives –
MACS by Cooperative Development Foundation (CDF) since
´90s
9 Members 79,238, 269 WTC, 176 MTC
9 Mobilizing resources? Total Funds: 4,055 lakhs. Loans 3211
lakhs (surplus)
 Does theory work in this context (MACS)?

9 Case of Woman’s Thrift Cooperatives: Model Swa -kru-shi meaning

One-Own Effort
 Case of Woman’s Thrift Cooperatives
9 Encourage savings as a first step to get a loan. Mobilizing savings?
9 Develop sense of membership and ownership – Unlimited liability.
9 Fee for membership Rs 20 month. Size 300-1000 members.
9 Board of directors elected among themselves. Managed by members.
Women empowerment. Form by residents of villages
9 Savings products: compulsory thrifts, recurring
deposit, fixed dep.
9 Form a JLG (5) to have 3 times savings as
loans. Otherwise, 80% savings.
9 Social pressure: take the door! Social capital
9 Insurance, Rs. 10,000. Int. rates 18%, 15%, 12%
9 Spread 2%. Returns build capital, annual bonus
9 Some take advantage of techology. Role of CDF
 Does theory work in this context (MACS)?
9 Incentives of credit coop design Apparently Yes. Proper
incentives in the
9 Regulation give space for these institutions. institutional design drives
9 Institutions member-owned (general social sanctions.
perception)
9 Whose interest are they operating? theirs
9 Social sanctions in place: belong to same
community + own institution + member
managed.
9 Use of social capital.
9 Stronger incentives to monitor and enforce
contracts
Seems to be a role in
9 Motivation driven by sense of ownership mobilizing local deposits,
9 Incentives for savings in own institution peer monitoring and
addressing risk.
 ??????…
9 …how can regulatory environment shape institutional
design of credit cooperatives?…
9 …what implications does it have for the role of credit coop
in microfinance?...
9 …what is the space for credit cooperatives as conduits for
microfinance lending and mobilizing savings?.
9 …are social sanctions stronger in credit and thrift
cooperatives (same community + own shares)?...
9 …if space identified, how can current cooperative work be
leveraged?...
9 …study on impact evaluation MACS-CDF? Innovative way
of working with them?...
Thanks

Photos by Frida Ruiz