Supreme Court Issues Directive to Address Systemic Crisis in Nepal's Cooperative Sector

Kathmandu. The Supreme Court has termed the current crisis in the cooperative sector a 'systemic failure' and issued a directive order for its resolution.

A bench of Justices Kumar Regmi and Meghraj Pokharel has issued a directive to establish a 'Cooperative Victims Relief Fund' by confiscating the assets of cooperative officials and loan defaulters found guilty of misappropriating savings. The court has directed that priority for relief from these confiscated funds be given to female victims, single women, senior citizens over 60, Dalits, and persons with disabilities.

Advocate Rabindra Prasad Sharma and other petitioners had filed a writ petition claiming that savings and credit cooperatives were illegally conducting banking transactions without permission from Nepal Rastra Bank, putting billions of rupees of public money at risk and committing fraud. The full text of the verdict was recently made public.

Although the petitioners demanded the cancellation of cooperative registrations due to unauthorized banking activities, the Supreme Court ruled that the nature of savings collected by cooperatives from their members differs from deposits collected by banks from the general public. Stating that internal transactions within cooperatives do not require Nepal Rastra Bank's permission, the court rejected the demand for mass cancellation of registrations. However, it issued directive orders in the interest of public welfare.

While dismissing the writ, the court cited Article 44 (Consumer Rights) and Article 51 (Directive Principles of the State) to remind the state of its constitutional duty to protect victims' savings. The court also analyzed loopholes in the Cooperative Act (2074). It identified lack of transparency in auditing, lack of discipline in loan disbursement, and the absence of savings insurance as structural weaknesses.

The court's verdict clarifies that cooperatives should not become banks, but they must be brought under a regulatory framework as secure as that of banks.

The court concluded that if the state does not pursue the path of a 'Victims Relief Fund' and 'strict legal action' to protect hard-earned money, this crisis will deepen further.

The court has issued an 8-point directive order to resolve the crisis. The first directive calls for publishing a 'National Digital List' of problematic cooperatives and initiating the process to freeze assets held by suspicious operators and their families. It mandates taking inventory of institutional and personal assets of suspicious officials and freezing them until the problem is resolved.

Furthermore, it orders special audits for all cooperatives exceeding a specified transaction limit, with reports to be made public and submitted to the Department of Cooperatives.

The second directive orders the federal and provincial governments to establish a relief and compensation mechanism, specifically the 'Cooperative Victims Relief Fund'.

The Supreme Court has directed that the fund be financed through confiscated assets of guilty officials and loan defaulters, a percentage of annual cooperative development fees, and government budget allocations. It emphasizes prioritizing relief for single women, senior citizens, Dalits, indigenous communities, and persons with disabilities, while creating a time-bound compensation plan to return principal amounts to all victims.

The third directive is addressed to the Department of Cooperatives, provincial, and local governments, ordering them to issue guidelines for clear division of regulatory responsibilities as soon as possible. It mandates the end of the 'no-regulation' state and the appointment of a clear regulator for every cooperative.

It also mandates the implementation of a system where monthly financial statements are uploaded to an integrated online portal, and members can access real-time details of their savings and loans via mobile apps or SMS.

Cooperatives exceeding specified transaction limits are now required to undergo annual audits by auditors certified by the Institute of Chartered Accountants of Nepal, with reports published in the public domain.

The court also ordered the issuance of clear standards regarding the maximum ratio of savings to loans, risk limits for single borrowers, sectoral loan limits, and liquidity ratios in consultation with Nepal Rastra Bank.

The fourth directive focuses on governance reform, mandating that chairpersons and CEOs of cooperatives exceeding specified transaction limits must complete financial literacy training.

It also orders strict enforcement of rules preventing more than two members of the same family from serving on the board, limiting officials to two terms, and implementing a 4-year cooling-off period before re-candidacy. It further mandates that audit committees be directly elected by the general assembly to ensure autonomy, preventing the board of directors from dismissing them.

The fifth directive orders the formation of an independent Cooperative Investigation Commission consisting of experts to investigate all cases of cooperative embezzlement over the last 10 years and submit a report. It also suggests studying the establishment of dedicated benches in district courts to expedite cooperative-related cases and utilizing the provisions of the Money Laundering Prevention Act, 2064, to confiscate assets of guilty officials both domestically and abroad.

The sixth directive concerns ensuring access to justice, ordering the National Legal Aid Committee to provide free legal representation to victims, especially the economically disadvantaged, women, and marginalized groups. It also mandates the establishment of a one-door system for hearing complaints in every district, along with online registration, SMS updates, and a toll-free helpline, and the deployment of mobile legal aid teams for remote areas.

The seventh directive addresses legal reforms, ordering the government, Federal Parliament Secretariat, National Cooperative Regulatory Authority, and Nepal Rastra Bank to amend the Cooperative Act, 2074, to include provisions for recovering investments made outside of member interests, mandatory deposit insurance, and clear personal liability for officials. It also mandates that Nepal Rastra Bank prepare and implement procedures for inspecting cooperatives with savings and credit transactions exceeding 500 million rupees.

The eighth directive focuses on awareness and capacity building, ordering the Department of Cooperatives and the Ministry of Land Management, Cooperatives and Poverty Alleviation to conduct annual financial literacy programs for members. It also suggests collaborating with the Ministry of Education to include cooperative principles and financial literacy in the secondary school curriculum.