Yadav Humagain

KATHMANDU: The federal government has announced in the budget for the upcoming fiscal year (FY) 2080/81 to return the savings of up to Rs 500,000 of the depositors from the collateral of the operators of problematic cooperatives. This announcement after a number of cooperatives turned problematic, either due to the embezzlement by the cooperative owners or their failure to recover investments. High-profile figures, including Deputy Prime Minister and Home Minister Ravi Lamichhane and other ministers, have also been accused of cooperative fraud.

With the increasing number of problematic cooperatives, it is evident that billions of rupees need to be arranged immediately to implement the government's announcement. However, the provision of credit guarantee fund in the Cooperative Act, 2074, meant to safeguard savings and credit investments in cooperatives, remains unimplemented.

If the fund had been established when the Cooperative Act came into force, billions of rupees could have been recovered by now. Yet, even after seven years of the enactment of the Act, the establishment of the fund remains a topic of debate. Section 101 of the Act states, "the government may create a fund for the protection of the savings and loans provided by the organizations with the participation of the cooperatives."

According to the Cooperative Regulations, 2075, the guarantee fund protects savings up to Rs 300,000 and loans up to 500,000. There is also a provision in the regulation for compensation from the fund for organizations in trouble.

"If the fund had been created according to the provisions of the law, the amount would have reached billions," said one of the directors of the cooperative federation. In 2076, the federation prepared a draft procedure for the operation of the guarantee fund and submitted it to the Ministry of Land Management and Cooperatives. Additionally, the Cooperative Problem Solving Suggestion Task Force recommended the immediate establishment of the guarantee fund last year. However, the fund has not been established.

The Cooperative Act, 2074, also envisions a credit information center to exchange information on cooperatives' credit disbursements and blacklist non-paying members. However, this center has not been established, leading to complaints from cooperative owners about individuals taking loans from multiple cooperatives and misusing them. Despite the decision of the National Development Problem Solution Committee, a high-level mechanism to monitor and evaluate the development policies, plans and programmes adopted by the country, to establish a credit information center, facilitated by the Ministry of Finance, the government has yet to finalize its modalities.

Similarly, the Act envisions a debt recovery tribunal to collect the debts of cooperatives. Currently, there is only a Debt Recovery Tribunal for banks and financial institutions recognized by the central bank. Despite the Federal Parliament issuing a new Act 25 years after the Cooperative Act, 2048, to systematically develop the cooperative sector, the failure to implement various structures and policies has left the sector in disarray.

Provisions such as the Savings and Loan Protection Fund, Credit Information Center, and Debt Recovery Tribunal are just a few examples of unimplemented structures despite being stipulated in the Act. Over a dozen structures and legal arrangements meant to manage cooperatives remain unimplemented. The Act also mandates that a person cannot be a member of more than one cooperative of the same nature at a local level and requires those with multiple memberships to choose one within three years. Yet, this provision has not been enforced. Similarly, the prohibition against cooperative directors working as employees in organizations with a turnover of more than Rs 20 million has not been implemented.

Gauri Bahadur Karki, the former chairman of the special court, stated that cooperative directors exert political pressure to adapt cooperative laws to their advantage. He noted, "Government employees are also swayed by monetary incentives."

Karki, who chaired a high-level commission a decade ago regarding the return of funds embezzled by the cooperatives, had suggested strict regulatory provisions. He emphasized that although the current Act has stricter regulations than the 2048 Act, the government's political alliances with the operators of cooperatives hinder their implementation.

The Cooperative Act also includes various funds to strengthen institutions, but they remain unimplemented. The promotion fund, meant to be mobilized through the Ministry of Cooperatives, is stalled, and the Stabilization Fund, established to protect cooperatives in difficult situations, covers only a few organizations.

Sudarshan Prasad Dhakal, a cooperative expert, criticized the government and cooperative campaigners for using cooperatives as mere tools, claiming that the sector is poorly managed. He argued that without strengthening regulations, implementing provisions like the guarantee fund and debt recovery tribunal is impossible.

Chandra Prasad Dhakal, president of Nepal Savings and Credit Central Cooperative Association (NEFSCUN), asserted that stakeholders, along with the government, are responsible for implementing the law. He emphasized that many problems in cooperatives could be avoided if structures like debt recovery tribunal, credit information center, and savings and credit guarantee funds were established. However, he insists that financial cooperatives need a separate law.

Despite provisions in the Cooperative Act, the government has struggled to implement key regulatory measures. Since 2075, the government has been applying reference interest rates and setting maximum limits on interest on loans. However, instructions to maintain a 6 percent difference between interest on savings and loans and a 1 percent service charge have not been effectively enforced. Nepal Rastra Bank has been tasked with overseeing cooperatives with capital or turnover exceeding Rs 50 million but has refused to do so, citing the absence of legal authority. The Central Bank Act has recently been amended to grant this authority, but the provision remains unimplemented.

Challenges After Federalism

With the country adopting federalism, the regulation of cooperatives has been decentralized to local levels. Cooperatives operating at the local level are regulated locally, those at the regional level are overseen by provinces, and inter-provincial cooperatives are managed by the federal government.

Pitambar Ghimire, the registrar of the Federal Department of Cooperatives, noted that since all federal, state, and local governments are responsible for regulating cooperatives, the Cooperative Act's implementation has been overlooked. "All governments have the right to register, promote, and regulate cooperatives by issuing separate laws," he said, "Therefore, implementing the Federal Cooperative Act was not a priority."

Recently, the government has shown interest in implementing the Cooperative Act due to the rising number of organizations failing to return the members' savings. The Ministry of Land Management and Cooperatives, which is preparing to form a second-tier regulatory body as announced in the budget, has also initiated the process to establish a credit information center, debt recovery tribunal, and savings and loan protection fund.