NABARD chooses to dump PACS in gay abandon

The main contents of the latest circular instruction of NABARD circulated by NAFSCOB once and for all gave a go-by to the age old untiring repetition of ‘Cooperative have failed but must succeed.’.

The SCBs/DCCBs have been instructed now:

1. To transfer assets and liabilities of PACS to DCCBs/SCBs

2. The assets of PACS arising out of all lending operations will stand transferred to the books of DCCBs /SCBs along with the related liabilities.

3. All deposits collected by the PACS would also be transferred to the DCCBs/SCBs.

4. PACS will not accept deposits on its account and will not do lending operation of any kind on its behalf henceforth under the arrangement.

5. However, they will carry out the services both in respect of lending operations and collection of deposits on behalf of DCCBs on pre-decided commission or fee basis.

6. PACS would, however, do other businesses as an independent entity out of its own fund and earn income.

7. The share capital mobilised by the PACS from its members by way of share linked capital of the loans provided will now stand transferred to the books of DCCBs/SCBs and form part of share capital of DCCBs.

8. The borrowing members and the depositors will have to become the members of DCCBs/SCBs.

9. DCCBs/SCBs will make arrangements to ensure transfer of relevant securities /documents executed in the name of PACS on its name.

10. Necessary arrangements be entered into between the PACS and DCCBs/SCBs to ensure implementation of the above directives.

These do not form part of the recommendations of the RBI Expert Committee.

NABARD’s ostensible intention to separate the core from non-core business of PACS has been pushed with these instructions without equipping the system to handle them.

Second, it has failed to implement business development plans in PACS for three decades of its supervision and now it wants to drive them to a corner.

Third, it tolerated indiscipline in accounting standards and State audits of the PACS, DCCBs and even SCBs to a large degree until Vaidyanathan Committee designed the relief package conditioned by the introduction of proper accounting, audit, professional management and technology as also appropriate legal amendments to the State Cooperative laws. Under its supervision, none of the DCCBs have the history of closing the books of accounts at the end of the year on the 31st March.

Even after the relief package has been handed down NABARD has not been able to monitor these changes systematically and systemically resulting in misuse and even abuse of the relief package.

The compromises led the RBI to re-examine the structural weaknesses of the Short Term Rural Cooperative Credit Structure (RCCS) through the constitution of an Expert Committee just an year back under the Chairmanship of Dr Prakash Bakshi and he is also the Chairman of NABARD, a point to be noted.

The Expert Committee was unequivocal in its recommendation that PACS are the foundation of the RCCS and but for them credit to small and marginal farmers would have been a severe casualty as the commercial banks and the reformed RRBs are interested in commercially viable medium and large farmers and not the economically weak and socially desirable clientele, the small and marginal farmers. This would mean that PACS as lending institutions for agriculture have a distinct place and needs to be preserved.

In Cooperatives of all hues, credit access is available only for members while deposits can be placed at the depositors’ own risk. Members while taking credit also contribute to the share capital in certain agreed proportion. States are conveniently barred from providing capital to the RCCS beyond 25% and have been granted autonomy.

In the meantime, following the recommendations of the first Financial Stability Report (Dr Rakesh Mohan), the DCCBs have all been licensed under liberal capital adequacy norms by April 2013, just a year off the scheduled date and have been brought into mainstream banking, with some of them adopting even core banking solutions.

Deposits can be secured by the PACS but without the Deposit Insurance Credit Guarantee Corporation of India cover. Therefore, even for doing non-core business capital cannot be accessed by them. Once the DCCBs seize all the assets of PACS, the later would not have any collateral to raise the resources from other lending institutions.

The latest instruction that the Societies shall do their non-core business only with their own capital and their core lending business for farm and non-farm activities can be done only for and on behalf of the DCCBs/SCBs cuts at the root of PACS on one hand, and negates the financial inclusion agenda of the government on the other.

In the absence of PACS, the DCCBs/SCBs have to go in for restructuring. The States have to amend their regulations to permit the DCCBs to do direct lending to farmers by taking them as members and shareholders simultaneously. Elections to the Boards of DCCBs have to be held from this larger constituency and representative General Body has to be defined in the Amended Cooperative Acts. Depositors cannot be members as of now.

PACS today serve at best as political platform thanks to the willful neglect of NABARD for decades to bring about financial discipline and to protect equity among them. The States and Centre are too busy at the moment carving out strategies for 2014 General Elections. Legal remedies also seem to be at distance with the annulment of 97th Constitution Amendment Act 2011 except for Article 19 Section 4 (C) that only gives the fundamental right for formation of cooperative society and the definition of such society. Therefore, NABARD chose this time with gay abandon to dump the PACS into economic garbage.