NRB fears bad co-ops could destabilise financial system
KATHMANDU, AUG 30 -
Nepal Rastra Bank (NRB) has warned that allowing savings and credit cooperatives to violate cooperative principles could pose a risk to financial stability and open the country’s financial system to systemic risk.
“Considering their growing size and influence, these cooperatives should be strictly monitored and supervised with standard regulatory norms,” stated the latest Financial Stability Report published by the central bank. A growth in number of institutions naturally brings both opportunities and risks, it added.
The report further stated that issues related to the regulatory and supervisory framework for these cooperatives should be addressed as early as possible with the formulation and implementation of sound measures to ensure financial health and stability.
According to the central bank, some of the credit and savings cooperatives have command over a wide range of depositors and credit-users in different communities. Their turnover, as per their own reports, exceeds that of finance companies.
A total of 130 cooperatives have been declared to be troubled. A high-level probe commission formed under the coordination of former chairman of the Special Court Gauri Bahadur Karki to investigate them received 12,962 complaints against them.
These cooperatives were found to have misappropriated Rs 11.41 billion in deposits and interest of the general public.
NRB Deputy Governor Maha Prasad Adhikari, who headed a committee to probe the status of the cooperatives, said that bad governance practices were mainly responsible for these cooperatives getting into trouble.
“Many city-based savings and credit cooperatives have been lending against the cooperative principle, and their promoters have been using the public’s deposits as per their wish,” he said.
“People still understand a cooperative as a finance company, and this has led to an erosion of public confidence against finance companies licensed by the central bank. Such trust deficit may result in systemic risk in the financial sector.”
As of the last fiscal year, cooperatives held deposits totalling Rs 163 billion, said the Department of Cooperative. This is 11 percent of all the deposits held by A, B and C banks and financial institutions.
Many cooperatives have huge exposure to a single sector such as real estate. Oriental Cooperative went belly up due to its excessive investments in the real estate sector. People have filed claims totalling Rs 5.5 billion against cooperative which was promoted by realty trader Sudhir Basnet, according to the high-level commission.
“If a number of large cooperatives like Oriental flop, it may invite systemic risk,” an NRB official said.
Another central bank official who was involved in monitoring cooperatives said that even though only a few cooperatives had actually failed, bad governance was rampant particularly in big cooperatives centred in the Kathmandu valley. “All of them have a similar kind of problem,” he said.
The committee formed to investigate fraud and embezzlement in the financial transactions of cooperatives has highlighted that many cooperatives are being run as a family business, with family members acting as directors and audit committee members.
Additionally, the deposits in such cooperatives, especially those in urban areas like the Kathmandu valley, were found to have been invested in unproductive activities and real estate.
NRB has stated that a sound regulatory and supervisory authority can control such malpractices among cooperatives.
The committee said that in the absence of a sound regulatory and supervisory authority, haphazard investment practices, including those in riskier real estate projects, were creating a threat to the financial sector and the economy as a whole.
“These threats are more serious for economically vulnerable depositors associated with the cooperatives,” stated the report.
The central bank’s report urged executive members of savings and credit cooperatives to analyze how much risk they can absorb in a given situation, stating that credibility and security were the key factors for savings and credit cooperatives.
“There is an imperative need to devise a customized mechanism of credit analysis and evaluation before making investment decisions,” stated the report.
The executives should build professionalism in analyzing calculative risk instead of speculative risks.
A code of conduct based on the standard of corporate governance and social responsibility of the business—one of the principles of cooperatives—should be developed and implemented effectively under the supervision of a well-functioning regulatory authority, it said.
Cooperatives hold Rs 163b in deposits
Cooperatives held 11 percent of deposits collected by A, B and C class bank and financial institutions (BFIs) in last fiscal year, down from 12.76 percent in 2012-13. Deposits held by all A, B and C class BFIs amounted to Rs 1,468 billion as of the last fiscal, while cooperatives had Rs 163 billion. Deposit mobilisation of commercial banks stood at Rs 1,196 billion.
The growth rate of cooperatives’ deposit mobilisation also fell to 5.59 percent in 2013-14 from the previous fiscal’s 13.66 percent. According to the Department of Cooperatives (DEoC), cooperatives’ deposits increased to Rs 163 billion last year from Rs 158 billion in the previous year.
DEoC officials say increased scrutiny after funds misappropriation allegations and troubles faced by several cooperatives discouraged people to deposit their money in them. Bishnu Prasad Ghimire, under-secretary at the department, said problems seen in several savings and credit cooperatives helped increase public awareness about safety of their money. “People are now more attracted towards agriculture cooperatives,” he said.
Last year, 1,645 new cooperatives received operating licence, taking the total number to 31,177. Ghimire said most of the new cooperatives are related to the agriculture business. “At a time when savings and credit cooperatives are falling, many people, mainly those from out of the valley, are attracted towards agriculture cooperatives,” said Ghimire, adding the government’s priority to agriculture-based cooperative also played a crucial role.
According to DEoC, the new cooperatives were mainly registered in Tarai districts like Rautahat, Bara, Jhapa, Morang and Siraha. These cooperatives have lent Rs 159 billion, up by Rs 25.18 billion, over the review period.
Pashupati Prasad Ghimire, an officer at the Division Cooperative Office, Kathmandu , said a large number of cooperatives are investing in small and microenterprises and agricultural business. “Unlike in the past when they used to concentrate more on the realty business, they have now diverted their investment towards these areas,” he said.
Source: The Kathmandu Post
