India: Rural Cooperative Credit Restructuring and Development Program

Finance / Inclusive finance

While overall gross domestic product growth has been robust in recent years, it has not been broad-based or inclusive. Of particular concern in this regard is the poor performance of agriculture, which has been on a long-term declining growth trend. With about two-thirds of the population deriving their livelihood from agriculture and nearly three quarters of the poor (or nearly 200 million) living in rural areas, the impact of the decline in agricultural performance on the quality of life of the poor has been severe. The plight of the rural poor has been thrust into the international spotlight in recent years as a result of suicides by highly indebted farmers and growing rural unrest in many areas.

Development experience has confirmed that rapid, broad-based, and labor-intensive economic growth is the best means to reduce poverty. Broad-based agricultural growth offers enormous opportunities for reducing rural poverty by expanding on- and off-farm employment. Public policies, therefore, must continue to reduce the deterioration in the rural-urban terms of trade, strengthen social and economic infrastructure in rural areas, and revamp rural finance delivery systems.

While finance is a critical input for strengthening the rural economy and agricultural production base, the response of the formal rural finance system has been increasingly inadequate. The rural finance paradigm for the most part has been driven by credit expansion through government-owned or -controlled financial institutions, particularly within the CCS comprising primary agricultural credit societies, district central cooperative banks (DCCB), and state cooperative banks. While a substantial network of CCS institutions and an enhanced supply of services were established as a result, the CCS has neither been able to effectively address the demand and supply gaps in rural finance, nor function as a sustainable financial intermediary.

Although organized on the principles of self-governance and self-reliance, the CCS has fundamental policy, governance, legal, and institutional problems that have impaired its solvency, sustainability, and efficiency. As a result, the intended objective of enhancing rural financial intermediation, especially to the assetpoor and disadvantaged, has only been partially realized. The prevailing policy and legal environment for the CCS has increased the tolerance for poor financial and operational performance and prevented CCS members from having their say in the management of the CCS institutions.

Rapid rural finance outreach for poverty reduction and improved living standards can be significantly facilitated by revitalizing the CCS. CCS reform is critical to rural transformation because it has an all India membership base of 135 million and has links to the broader cooperative movement comprising processing, marketing, input distribution, dairy, and weaving. Reforming the CCS will provide the institutional base for potentially significant changes in the rural economic and sociopolitical landscape. Legal, regulatory, governance, and institutional reforms are required to remove these deep-seated obstacles to enable the CCS to provide more efficient and affordable financial services to the poor.

1. Establishing a Policy Reform and Implementation Framework

a. A nationwide policy framework for strengthening the short-term CCS

2. Building a Facilitating Legal, Regulatory and Governance Framework

a. A conducive legal framework for autonomous CCS operations

b. Orderly development of CCS and enhanced depositor protection

c. Democratic character of the CCS restored and governance enhanced

3. Institutional Reforms for Sustainability

a. International best practices mainstreamed in the CCS

b. PACSs strengthened to provide stronger foundation for the CCS

c. DCCBs reformed into sustainable institutions

d. SCBs reformed to effectively perform as apex institutions supporting efficiency and sustainability of the CCS