Government Strengthens Cooperative Authority with New Ordinance

Kathmandu. The government has further empowered the Cooperative Authority. The Cooperative Ordinance brought by the government has transformed the authority, formed to regulate and supervise cooperatives doing savings and loan business, into a strong authority with more rights and responsibilities.

The ordinance has integrated the scattered powers to regulate and take action against cooperatives in the past and handed them over to the authority. This ordinance has established the authority as a supreme and all-powerful body.

Now, as soon as a complaint is filed against any cooperative institution and an investigation begins, the authority will be able to freeze the movable and immovable assets, bank accounts, and shares of the directors and their relatives even before declaring the institution problematic.

Similarly, the authority has been given the special power to freeze passports and ban foreign travel of directors and employees who do not return depositors' money, to prevent them from fleeing abroad. The authority has also gained the strong power to arrest and produce directors who do not cooperate with the investigation or go into hiding, from anywhere with the help of the Nepal Police.

Previously, lacking any authority, the authority could not address the complaints received. It did not even have the power to write to the police when fraud complaints were received. To such an extent, the registration process of cooperatives had been stalled for about a month due to the inability to extend the deadline for registering cooperatives.

Now, all cooperatives doing savings and loan business must compulsorily register with the authority. This will also be renewed annually. The main regulatory body for these cooperatives will now be the authority. Only cooperatives that do not fall within its jurisdiction will be overseen by the Department of Cooperatives.

Limit for Main Business Set at 50 Percent

The ordinance has relaxed the criteria for distinguishing whether a cooperative institution is of savings and loan nature or not. Previously, even if only 30 percent of the total business was savings and loan transactions, it was considered the main business of savings and loans, but now this has been increased to 50 percent.

This means that cooperatives registered in the name of agriculture, consumer, or multipurpose will not be able to invest more than 50 percent of their total business in savings and loans. If they are doing so, they will have to completely stop such financial transactions within the next three years.

Cooperative Unions Prohibited from Retail Business

The practice of district, provincial, or central unions, which act as umbrella organizations for cooperative institutions, collecting savings and investing loans just like primary cooperatives at the lower level, had increased financial risks. The ordinance has discouraged such activities.

Cooperative unions will now have to focus only on capacity building, training, and promotional work for their member institutions. Legal provisions have been made to completely stop the practice of directly collecting deposits from the general public and providing retail loans, other than to member institutions.

Strictness in Registration and Record Keeping

The ordinance has further tightened the transparency of accounts and member records maintained by cooperative institutions. The requirement to enter every transaction of cooperatives into an integrated information system and to disclose the source of funds for large depositors has been made even stricter.

The ordinance has opened the way to not give legal recognition to accounts with unclear or hidden records and to further investigate the registration process of such institutions. This will help prevent crimes such as the use of black money and money laundering in the cooperative sector.

Interest Cannot Exceed Principal

The ordinance has made an important decision to address the complaints of cooperatives exploiting borrowers with exorbitant interest and penalties. Now, the total interest amount collected by any cooperative institution from a borrower cannot exceed the principal loan amount taken by that person.

This means that a person who took a loan of one lakh rupees will not have to pay more than one lakh in interest, no matter how many years later they repay or incur penalties. This legally curbs loan sharks operating within the cooperative sector.

Other Cooperatives Can Also Join Credit Information Center

Previously, only cooperatives doing savings and loan business were mandated to join the Credit Information Center. However, the scope has been broadened due to the increasing trend of individuals taking loans from various types of cooperatives and not repaying them.

Now, any thematic cooperative institution, including agriculture and multipurpose, can join the network of the Credit Information Center. Such institutions, which are not within the purview of the authority, can join the center with the recommendation of the Department of Cooperatives or the relevant provincial or local cooperative oversight body.

If this provision is implemented, it will help create a blacklist of defaulters and end the practice of defrauding one institution and taking loans from another.

Registrar of the Department on the Board of Directors of the Authority

The ordinance has brought about changes in the institutional structure to remove the lack of coordination between regulatory bodies. A new arrangement has been made to bring about functional unity between the strengthened National Cooperative Regulation Authority and the Department of Cooperatives of the Government of Nepal.

According to this, the Registrar of the Department of Cooperatives will now be an ex-officio member of the Board of Directors of the Authority. Not only was the Registrar not previously part of the Authority, but the Department of Cooperatives and the Authority had been practicing regulation in parallel.

Cooperatives Above 50 Crore to be Regulated by the Central Bank

In the context of large cooperative institutions with billions in turnover collapsing due to a lack of effective monitoring, the ordinance has drawn the central bank into this sector.

Now, the Nepal Rastra Bank will regulate and supervise the financial governance and risk status of cooperative institutions with a share capital or annual turnover of more than 50 crore rupees. The ordinance includes a provision for expert teams from the central bank to examine the accounts of such large cooperatives at the request of the authority.

Two Years' Deadline to End Dual Membership

The law continues the provision that prohibits a person from being a member of more than one cooperative institution of the same nature, and an additional two years' time has been given to abandon existing dual memberships.

Establishment of Cyclic Relief Fund to Provide Immediate Relief

After a cooperative is declared distressed, it takes years to recover depositors' money by searching for and auctioning off the assets of the directors. This long process causes significant hardship, especially to the weak, sick, elderly, and small depositors.

To manage this, the government has made a legal provision to establish a 'Cyclic Relief Fund'. From this fund, small depositors of problematic cooperatives will be immediately repaid a certain amount based on their deposits. The ordinance, published in the gazette on Friday, states that a cyclic system has been implemented whereby the management committee will later recover money by selling the directors' assets and reimburse the fund.