Proposed Roadmap for Cooperative Sector Reform in Nepal

Biratnagar. The cooperative sector is currently navigating a severe crisis, with billions of rupees belonging to millions of depositors at risk. A serious discussion is required on how to protect this sector during such times.

A committee led by Govinda Bahadur Karki, Secretary at the Office of the Prime Minister and Council of Ministers, formed by the then-government under Sushila Karki, has submitted a report recommending the dissolution of the Department of Cooperatives. The report suggests replacing the department with a powerful Cooperative Regulatory Authority equipped with quasi-judicial powers.

Furthermore, it recommends confiscating the personal assets of cooperative operators to facilitate the repayment of billions in deposits.

The report links the root of the cooperative crisis to political and administrative access. Citing academic and external studies, the report states, 'Concluding that political and administrative access is misused in the misappropriation of cooperative savings, the report recommends strict action against the guilty and the confiscation of their assets. Analysts have interpreted the cooperative crisis not merely as a financial problem, but as a lack of systemic governance and a deviation from principles.'

The study concludes that cooperatives have failed because they operated through a commercial lens, straying from their core values and investing heavily in unproductive sectors like real estate.

The report also answers why many past reports were shelved. 'Due to the influence of political protection on operators and the prevalence of conflicts of interest at the decision-making level, strict legal action against the guilty could not be taken, and impunity persisted,' the report notes. 'The tendency to interpret the autonomy and independence of cooperatives as arbitrariness and to cover up wrongdoings has weakened professional governance.'

The report puts forward a clear action plan on how to provide relief to depositors of troubled cooperatives. Prioritizing small depositors, the report suggests identifying members with savings up to 500,000 and repaying them on a priority basis through a Savings and Credit Protection Fund.

For large depositors and cooperatives facing liquidity shortages, the report introduces a new concept of issuing 'Cooperative Bonds'. 'To repay the savings of small depositors, the government should issue special cooperative bonds as needed to manage liquidity immediately,' the report states.

To solve the problem of cooperatives hiding actual details, the report emphasizes making the 'COPOMIS' system mandatory and real-time. 'The report mentions making the COPOMIS system mandatory to create an integrated digital database and freezing the transactions of institutions that do not enter accurate data.'

Stating that the current Department of Cooperatives has failed to regulate effectively, the report recommends its dissolution. 'Dissolve the existing Department of Cooperatives and hand over all regulatory responsibilities to an autonomous Cooperative Regulatory Authority with quasi-judicial and executive powers,' the report suggests.

Similarly, it is proposed to work on an asset management company model to manage the assets of the cooperative sector and create a permanent structure to settle the assets and liabilities of troubled cooperatives.

The report suggests leaving no stone unturned to bring cooperative fraudsters to justice. 'Grant the authority full quasi-judicial powers to freeze the passports, bank accounts, and assets of guilty operators, and to confiscate and auction their personal property,' the report states.

Additionally, it suggests implementing a strict 'one person, one cooperative' policy, tracked through a digital system to prevent individuals from serving as operators in multiple cooperatives.

To solve the problem of cooperatives hiding actual details, the report emphasizes making the 'COPOMIS' system mandatory and real-time. 'The report mentions making the COPOMIS system mandatory to create an integrated digital database and freezing the transactions of institutions that do not enter accurate data.'

Similarly, it is proposed to make compliance with international financial standards (PEARLS) mandatory and require every cooperative to publish a realistic white paper reflecting its true financial condition to inform its members.

The report also provides an action plan for these reforms. It mentions starting the repayment process for savings up to 500,000 immediately, freezing the assets of guilty operators, establishing a Cooperative Regulatory Authority within 1 year, conducting a separate O&M for cooperatives similar to the Federal Civil Service Act, and initiating paperless regulation by connecting all cooperatives to a digital system within 3 years.

To remove confusion regarding cooperative regulation among federal, provincial, and local levels, the report proposes classification based on capital and jurisdiction. The report suggests re-classifying jurisdiction based on transaction volume: up to 10 million for local, up to 500 million for sub-metropolitan/metropolitan, up to 1 billion for provincial, and above 5 billion for federal jurisdiction.

The report also provides an action plan for these reforms. It mentions starting the repayment process for savings up to 500,000 immediately, freezing the assets of guilty operators, establishing a Cooperative Regulatory Authority within 1 year, conducting a separate O&M for cooperatives similar to the Federal Civil Service Act, and initiating paperless regulation by connecting all cooperatives to a digital system within 3 years.

This roadmap report prepared by the Karki-led committee offers suggestions to stop investment in real estate, end conflicts of interest among operators, and return money to depositors. The report concludes that institutions that have not conducted audits or annual general meetings for three consecutive years and have not followed financial discipline should be immediately processed for registration cancellation or dissolution.