Cooperatives Brace for Consolidation Amid Govt Push for Merger

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Cooperatives Brace for Consolidation Amid Govt Push for Merger

Sagar Ghimire 

KATHMANDU, June 12: Following a footstep of bank and financial institutions (BFIs), cooperatives are also pursuing merger in recent days. 

According to the data of Department of Cooperatives (DoC), a total of 128 cooperatives have gone into merger to become 50 entities as of mid April.

This merger drive follows the government's recent push to lower the number of the cooperatives and strengthen their corporate governance. Amid a challenge of effective monitoring and regulation due to the high number of cooperatives, particularly saving and credit cooperatives, the government pursued a policy to promote merger of cooperatives. 

The government’s priority of cooperatives merger was even highlighted by the budget for the current fiscal year (2020/21). "Saving and credit cooperatives will be encouraged to go into merger," read the budget speech for the current fiscal year. 

Though the budget has announced that it will encourage merger among cooperatives, cooperative sector leaders say that the government has not introduced any incentive or subsidy for those institutions which opt for amalgamation. The merger spree so far is largely driven by stiff market competition or regulatory push rather than government’s incentivization, they say. 

Paritosh Paudyal, chairperson of Nepal Federation of Savings and Credit Cooperative Unions Ltd (NEFSCUN), said that most of the cooperatives have gone into merger after realizing that the merger makes them financially stronger and more competitive in the market. 

“When there is a lot of competition in the market due to presence of high number of cooperatives, it makes sense for many to go for merger and become bigger and stronger. It helps them to cut costs and stay competitive in the market,” said NEFSCUN Chairperson Paudyal. 

The merger also brings business consolidation and bolsters the capacity of saving credit cooperatives to withstand any shock or uncertainty, according to NEFSCUN Chairperson Paudyal.  

“Bank and financial instiututions are expanding their reaches. With higher investment on technology, they are cutting costs and providing their services at cheaper cost. On the other hand, many cooperatives are still operating manually,” said Paudyal. “Now, these cooperatives will also have to make investment in such technology and softwares to lower their costs and stay relevant in the market. Smaller cooperatives may not be in the position to do so. The only way forward is consolidation through mergers,” he said. 

Most of the cooperatives have found the merger a way to cope with membership duplication and become bigger and stronger entity that benefits their members due to lower costs and higher returns.    

Ekikrit Friendship Saving and Credit Cooperative Society Ltd (EFSCCS) is one among those cooperatives. The Dolakha-based cooperative is an entity formed after a merger among 14 different saving and cooperatives. In fact, the cooperative’s merger journey began even before the government started pushing for the amalgamation of cooperatives. It commenced its integrated operation in December 2014 following a merger between nine cooperatives. Three years later, it wooed two other cooperatives for the marriage. But, its merger journey did not stop there. Three other saving and credit cooperatives also merged into Ekikrit Friendship last year.   

Keshab Prasad Dahal, the CEO of EFSCCS, said that their merger initiative was aimed mainly at addressing the problem of membership duplication and making the institution financially stronger and bigger. 

“While there were many members who were getting services from more than one cooperative, we thought combining them would be in the best interest of both institutions and our shareholders. The consolidation not only helped the cooperative to enhance its financial capacity but also enabled it to provide loans at cheaper rate as well as higher return to the shareholders,” he said. 

According to CEO Dahal, the total number of shareholders has declined to nearly 5,500 from over 12,000 in 2014 while also increasing the capital and volume of deposits and loans.       

The government’s objective behind pushing for merger is aimed at lowering the high number of saving and credit cooperatives in the country, particularly in urban areas. Due to the lack of government’s capacity to supervise and regulate them, weak corporate governance and internal control in many cooperatives have become a serious concern. 

Officials are worried about the possibility of replay of the crisis of 2013 when at least 150 cooperatives including Oriental Cooperative had ran into trouble due to poor regulation. A committee led by former Special Court Judge Gauri Bahadur Karki had found these troubled cooperatives misappropriating nearly Rs 11 billion in deposits including Rs 5.5 billion by Oriental Cooperatives run by Sudheer Basnet. These depositors are still waiting to get their money back. 

Loosely-regulated cooperatives getting intro trouble is not the only risk that the government is worried about. There are also concerns of lack of monitoring and poor regulation posing a threat to the financial stability of the country. While bank and financial institutions are under strict regulation of Nepal Rastra Bank (NRB), thousands of saving and deposit cooperatives which also provide similar services are largely operating with little or no regulatory check.  

“High number of cooperatives has become a challenge to carry out supervision and enforce regulation. So, we have been pushing for the merger. We have set standards which even allow the government to send cooperatives into forceful merger,” said Surendra Raj Paudel, the spokesperson of the Department of Cooperatives.  

In 2019, the government introduced cooperatives regulation with a provision requiring existing cooperatives that operate against the standards to go for forceful merger.

As per the new regulation, the government will allow registration of only one cooperative per 5,000 people in a ward of metropolitan and sub-metropolitan cities. Similarly, there will be one cooperative per 2,000 people in municipal area whereas the government will issue license to only one cooperative for every 500 people in rural municipality, according to the new regulations.
 “By fixing the number of cooperatives that can be operated in certain area based on population, the government has made it intention clear to send cooperatives into merger, particularly in urban areas, in a forceful way if required,” said the department’s spokesperson Paudel.

There are a total of 34,512 cooperatives across the country as of December 2017, according to the data of the department. Among them, the number of savings and credit cooperatives is the highest. 13,578 savings and credit cooperatives are in operation in Nepal. They have mobilized a total of Rs 217.49 billion in deposits and disbursed Rs 179.88 billion in loans.

However, cooperative leaders see a discrepancy in government’s policy and its action when it comes about reducing the number of cooperatives. 

“On the one hand, the government says that we already have more than enough cooperatives in the country. On the other, local governments are still registering cooperatives,” said NEFSCUN’s Chairperson Paudyal. “The government should first fix the number of cooperatives that the country needs and than implement its policy accordingly,” he added. 


 

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