Rising number of cooperatives poses systemic risk to financial sector

Rising number of cooperatives poses systemic risk to financial sector

The latest Financial Stability Report published by the central bank has warned of systemic risk to the financial sector due to ballooning cooperatives in recent years. The cooperatives, unlike their basic norms, have earned bad name in Nepal due to violation of the international cooperatives principle and political patronage. There is a need of strict monitoring and supervision of the cooperatives as they have been growing in size with increased influence lately, the report read, adding that quantitative growth brings both opportunities and risks. "The regulatory and supervisory framework for the cooperatives is an urgent need to ensure financial sector's health and stability." Some credit and savings cooperatives have mobilised huge deposits and lent heavily, the central bank report stated, adding that their turnover, according to their financial reports, exceeds that of finance companies. Earlier too, the central bank has asked the government to form a second tier regulatory institution to monitor and supervise cooperatives. However, political pressure from some parties delayed the formation of the regulator till date. However, some 130 cooperatives have been declared troubled ones till date. The government had formed a high-level probe commission under the coordination of former chairman of Special Court Gauri Bahadur Karki  to investigate into the troubled cooperatives. The commission had received some 12,962 complaints equivalent to Rs 11.41 billion in deposits and interest against the cooperatives. According to the deputy governor of the central bank Maha Prasad Adhikari, who headed a committee to probe the status of the cooperatives, poor governance in them has thrown the cooperatives into the trouble. The urban savings and credit cooperatives have been mobilising deposits and investing in land, housing and stocks with a single sector exposure that is also against the financial norms. "They have been misusing the public deposit according to their personal wish," he said, adding that public is losing their confidence on finance companies as they still take cooperatives as finance companies. "The erosion of public confidence on finance companies will hit the financial sector," Adhikari added. The finance companies are licenced by the central bank and strictly monitored, and supervised to safeguard the public deposits. According to the Department of Cooperative, cooperatives have mobilised deposits worth Rs 163 billion – that is some 11 per cent of the total deposits mobiliced by Class A commercial bank, Class B development bank, and Class C finance company – by the end of last fiscal year 2013-14. The central bank data revealed that deposit mobilisation of commercial banks stood at Rs 1,196 billion by the end of last fiscal year. The Department of Cooperatives also revealed that cooperatives’ deposits has also increased to Rs 163 billion in the last fiscal year from Rs 158 billion a fiscal year ago. "Some 1,645 new cooperatives received operating licence, making a total number of cooperatives to 31,177."
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