Kathmandu. A high-level inquiry commission constituted by the government has concluded that the cooperative sector is heading towards crisis due to increasing financial irregularities, weak regulation and activities against the basic principles of cooperatives. The report prepared by the commission formed by the government to investigate the irregularities in the cooperatives has concluded that although the cooperative sector is an important foundation of Nepal’s socialism-oriented economy, the lack of effective regulation and good governance has caused a huge erosion in the people’s trust. 

According to the Commission, although the Cooperative Act, 2048 and the Cooperative Act 2074 have provided the necessary legal basis, the poor implementation has led to the increase in anomalies and ano malies in the cooperative sector.According to the report, co operatives have abandoned the member-centric service, mutual cooperation and self-reliance and have become more focused on saving and loan transactions.

The report has shown that there is a lack of clearallocation of powers between the federal, provinces and local levels. The Commission concludes that the structure of the multi-regulator body has not been able to provide effective monitoring, inspection and supervision. The report states that there is a lack of skilled manpower, information system and technical capacity in the Department of Cooperatives and related bodies.

The Commission has stated that the tendency of co-operatives to expand branches by going out of their jurisdiction, investing savers’ money in risky areas and collecting deposits from outsiders has increased in cooperatives. The report also states that some cooperatives have adopted highly profit-oriented activities against the cooperative principle.

According to the report, there is also a lack of clarity in the classification and regulation of cooperatives.The report states that although most of the cooperatives are registered under different names, they have made savings and loan transactions their main business.

The Commission has suggested that cooperatives should be classified into cooperatives, consumer cooperatives and financial cooperatives mainly related to production and service business. The report states that production-based cooperatives should focus on activities related to agriculture, dairy, vegetables, seeds, handicrafts and small industries while consumer cooperatives should be linked to community service and consumption. The government has also asked the financial cooperatives to focus on savings and credit transactions within the limited framework.

Similarly, theCommission has pointed out the need for clear arrangement of powers and jurisdiction among the federations at the provincial, central and national levels.।

The policy that allows uncontrolled branch expansion is problematic

According to the commission, the problem has been compounded by the policy of allowing the primary cooperatives to expand their branches uncontrollably. The Commission has concluded that the branches and service centres have been expanded across the country by misusing the provision of service centre approval as per Rule 76 of the Cooperative Regulations-2075 BS. The report has suggested not to register new cooperatives, not to allow the opening of new branches and service centers and to gradually close down more than one branch that is currently in operation. According to the Commission, effective monitoring has been difficult as the data obtained from the information system has not been complete and reliable. The lack of an integrated, real-time information system has added to the challenges of identifying and controlling problematic cooperatives, the report said.

The report also pointed out that the good governance of cooperatives is poor.According to the CIAA, there have been serious financial irregularities such as misuse of corporate resources, excessive control of one person, diversion of resources of one institution to another, wrong auditing and lack of transparency on the part of directors and managers.

According to the Commission, another significant weakness in the cooperative sector has been found in the audit system.The report pointed out that collusion between auditors and institutions, falsified financial statements and lack of effective internal control contributed to the weakening of financial discipline. The Commission has concluded that the problem has increased due to the lack of necessary mechanism to protect the interests of savers. The report states that the deposit security system, credit information center and loan recovery mechanism like the banking sector have not been implemented effectively in the cooperative sector. According to the commission, the common savers have been directly affected due to the complicated and delayed process of dispute resolution.

“Lack of human resources and capacity development, lack of cooperative education and training, and lack of professional skills have deviated from the core principles,” the commission said.According to the report, the social objectives of cooperatives have been weakened as some cooperatives are more focused on saving and lending than their own object ives. The Commission has also said that effective regulation is difficult due to the increase in the number of cooperatives.

According to the commission, the number of registered cooperatives has reached around 31,000 and the state machinery has not been able to monitor and supervise so many societies regularly.Pointing out the need of merger among cooperatives of the same nature, the Commission has suggested that the cooperatives should be allowed to operate only on the basis of minimum capital, technology, human resources and financial capacity. The Commission has suggested that defunct and weak cooperatives should be encouraged to merge with competent institutions and those that do not follow the general body and financial discipline should be taken to the process of dissolution. According to the Commission, risk assessment and audit report of the concerned organization should be made mandatory before the merger.

Recommendation to tighten the registration and expansion of co-operatives

According to the Commission, policy and legal reforms are necessary for reform. The commission has suggested restricting the registration and expansion of savings and credit cooperatives, controlling the expansion of branches and stopping the operation outside its jurisdiction.

The Commission has also recommended to proceed with the registration process only on the basis of the financial condition of the cooperative, the capacity of the director, the condition of bearing the expenses and the risk assessment of the cooperative.The Commission has concluded that there is a need to strictly monitor the tendency of expanding service centers across the country by misusing the cooperative principle and rules. “Effective regulatory framework, integrated information system, strict governance system and actual implementation of legal reforms are essential for the reforms in the cooperative sector,” the NHRC said.