Rural Credit Cooperatives in India – Case Solution

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Rural Credit Cooperatives in India Case Answers

Abstract – Rural Credit Cooperatives in India Case Study

In this short paper, I will be analyzing the Rural Credit Cooperatives in India case study. This case deals with the challenges the cooperatives financial institutions (CFIs) in India face due to the history of over-regulation, financial weakness, and corruption in the country regarding the poor rural community.

Well-functioning CFIs are meant to help restore hope and boost income for the rural poor, but in the case of India, it was doing the opposite. Many farmers were committing suicide due to not finding any reasonable solutions to pay off debts.

CFIs were created due to the need to help the poor since the rural poor borrowing needs did not match the lending practices of traditional banking institutions (Li & Parmar, 2008).

Still, due to the involvement of commercial institutions in the management of CFIs, without proper government monetary support for CFIs, their systems were facing the problem of the decade, which was being self-efficient vs. community welfare.

The paper will discuss the current challenges of India’s rural credit cooperative system and explore which options are available to address and solve these problems.

About The Case

As stated in the case, farmers in different Indian villages were committing suicide due to the same reason, being in debt to money lenders.

Farmers in India have been facing tough years since the early 90’s when India liberalized its markets to international agricultural trade resulting in prices falling and having a negative effect on the lives of farmers.

On top of that, the weather has not been cooperating, and crops have not been growing appropriately, leaving farmers with insufficient revenues.

Due to these reasons, in 2006, the Indian Congress had appointed Mohan R. Narayan, who was a leading economist at a prestigious Indian university (Li & Parmar, 2008) and had also worked on the banking-sector development, to be part of a special committee to analyze Indians cooperative financial organizations. This special committee will try to make better policy recommendations and mend the current situation cooperative financial institutions are facing, which will not be an easy task due to the broken history of the system.

Rural Credit Cooperatives

CFIs include all credit unions and cooperative banks. A cooperative bank is a financial institution that belongs to its members, who pooled their own resources to create a bank.

In India, cooperative banks were born due to distress in Indian society that came from high levels of poverty, lack of adequate funds for small businesses and weaker sections of society, and stagnant activities.

CFIs have been trying to help the poor rural community and promote growth between them. Still, in such harsh times, without government support and funds, the impact of CFIs will not be significant enough, and they will not be able to help the Indian community fully.

These cooperative institutions in India have a three-level structure, where Primary Agricultural Credit Societies (PACS) lay at the very bottom, followed by 367 District Central Cooperative Banks (DCCB), and at the highest level are the 30 State Cooperative Banks (SCB).

Although rules and regulations change from state to state, the SCB does all the monitoring for CFIs. In contrast, The Reserve Bank of India (RBI) and the National Bank for Agricultural and Rural Development (NABARD) are in charge of record-keeping and policy recommendations for the CFI sector.

By 2007, CFIs had lost a significant amount of market share regarding agricultural credit since commercial banks had stepped in and stolen the more financially secure clients from the CFI, leaving CFIs with the poorest of the poor.

The rural population frequently borrows small amounts of money and repays these in small increments. They also lacked collateral, so formal banking institutions do not offer the best option for them.

The cooperative system provided the rural population with the credits they could not get from commercial banks. Still, due to insufficient collateral, high transaction costs, and small loan amounts, the net private-sector benefit of extending credit to the rural poor was…