Cooperatives in need of strong regulator as problem escalates

KATHMANDU, DEC 17 -

A need for a strong regulatory body to oversee cooperatives has been felt for a long time as they are not being properly regulated despite holding vast amounts in savings. The government had mulled forming a second-tier institution with central bank-like powers, but the plan fell apart due to strong lobbying against such a regulatory body.

Last year, Nepal Rastra Bank (NRB) sent a draft of the Micro Finance Authority Bill to the government which has envisioned forming an authority to regulate micro finance institutions (MFIs), cooperatives and non-government organizations that deal with deposits and credit.

However, with the Constituent Assembly gone, the bill is unlikely to be a priority for the government at the moment. “We had planned to bring cooperatives possessing more than a certain amount of capital under the authority,” said an NRB official.

With the proposed authority having sweeping powers like the central bank, it would help in controlling cooperatives acting against good governance principles. “However, strong lobbying by cooperatives , differences between the central bank and the government over whether to register it under the Company Act or a special act and differences over representation in the board delayed the proposed bill,” said the NRB official.

According to him, the central bank wanted to register the planned regulatory body through a special act like the NRB Act while the government wanted to register it under the Company Act. The government also wanted representation of cooperative associations in the organization’s board while the central bank has been thinking of filling it with retired and serving central bank officials and experts from the financial sector.

Unlike the Cooperative Act which has given the Department of Cooperatives (DoC) power to give necessary suggestions to cooperatives going against the act, the proposed bill has given the proposed regulator wide powers to notify errant cooperatives about their non-prudent acts, issue warnings in writing, downgrade their status, prohibit them from collecting deposits and issue loans and recommend liquidation.

 The proposed bill has also envisioned giving sweeping powers to the authority to notify, suspend, fine and remove the board of directors of the cooperative. The proposed bill has also barred board directors from getting loans from the institution they have promoted, providing loans to firms in which their directors are a partner and investing in other companies beyond the limit set by the proposed authority.

Central bank officials believe that the formation of a strong regulatory body will help discipline cooperatives that are going against prudent banking practices.

“As there are cooperatives doing transactions on a big scale, it is necessary to bring them under a strong regulatory mechanism,” said NRB spokesperson Bhaskarmani Gnawali. “The current Cooperative Act is not sufficient to properly regulate them, and a separate regulatory body with adequate power will help keep cooperatives in line.”

The DoC has been unable to take strong punitive action against cooperatives and their directors for embezzling huge amounts of public deposits. Officials at the Ministry of Cooperative and Poverty Alleviation (MoPA) said that the act was not powerful enough to let them take punitive action against wayward cooperatives and their directors.

A study of 133 cooperatives carried out by the DoC in cooperation with the central bank over the last three years found a number of anomalies in the cooperatives sector particularly related to bad corporate governance.

The study found that some cooperatives were being run like a family business with members of a single family acting as director, audit committee member, chief executive and employees. It also found a number of non-members and persons outside the working area of the cooperatives concerned acting as directors and audit committee members.

However, the DoC is yet to take any punitive action against any of them. Lately, problems have arisen in big cooperatives like Oriental and Guna and smaller cooperative like Exim and Ugrachandi, and depositors fear that their deposits might not be returned. President of the Nepal Federation of Savings and Credit Cooperative Union (NEFCUN) Min Raj Kadel said that their association was not against the idea of forming a second-tier institution, but wanted their representatives to sit on its board too. “As the principle of cooperatives is self-regulation, the association of particular types of cooperatives should also be involved in regulating and monitoring them,” he said.

Source: The Kathmandu Post