Role of Cooperative Governance Practices: A Study on Financial Cooperatives in Kerala

INTRODUCTION

Governance: Governance is the allocation of power within organizations and among stakeholders — governance is a basic question of the purpose of an organization and how it is conceptualized. Allocation of power through governance enables organizations to address three fundamental categories of problems: strategic interdependencies among stakeholders (co-operation and coordination among members, directors, managers, etc.); establishing a shared way of thinking to deal with an uncertain future; and maintaining legitimacy. Co-operative Governance: Cooperative governance is the act of steering co-operatively owned enterprises toward economic, social, and cultural success. It consists of answering key questions, defining roles and responsibilities, and establishing processes for setting expectations and ensuring accountability. Co-operative governance represents the legitimate process by which co-operative members select, in a democratic, participating, informed, and conscious way, the targets they intend for their organization and the ways to implement such targets, indicating leadership and following their work. It is a democratic process, since it pursues the strengthening of mechanisms for the exercise of a plurality of interests, recognizing the importance of divergent proposals, yet encouraging the establishment of convergence processes and support to established objectives with a view to greater efficiency and effectiveness of managerial actions. It is a participatory process because it assumes that democracy is built in just this way, being therefore crucial, according to good practices of governance, to facilitate and encourage the participation of cooperative members in the decision making processes, mainly in assemblies, strengthening channels enabling their opinions and interests to be captured by the instruments of collective decision. From this movement of democracy, participation, information, and consciousness, the basis for cooperative governance gains the strength that stems from these foundations. decisions and monitoring executive action and to ensure co-operative members have the right, and the duty, of selecting the future path of the co-operative. Adoption of such good practices will represent a contribution to further improve security in the financial co-operative system, reducing its financial and operating costs and boosting its competitiveness in the context of the National Financial System. The commitment of the Reserve Bank of India in disseminating and using such practices and their permanent updating, recognizing that good practices of governance in financial co-operatives are a dynamic process, requiring continuous action, that shall incorporate the experience of all agents involved. Guidelines shall be constantly adjusted to new scenarios and demands that may materialize, being important that in this first phase they are subject to debate and, after implemented, their result is known by all. International Co-operative Alliance (ICA) reports that co-operative governance is fit to build resilience in the face of complexity. Governance is a key component of the cooperative difference. The cooperative values and principles call for an open, voluntary, and democratic process of decision-making, and cooperative governance is an essential tool in applying those values and principles. In an increasingly regulated, complex, and interdependent global economy, where market pressures are high, a current reference on the basic tenets of cooperative governance is required. According to ICA, this exercise aims to help establish the tenets of co-operative governance and tease out its delimitations. Financial Co-operatives in India: As of the end of March 2016, India‘s co-operative banking sector comprised of 1574 urban co-operative banks (UCBs) and 93913 rural co-operative credit institutions, including short-term and long term credit institutions. Financial Co-operatives in Kerala: Kerala‘s rural financial co-operatives or credit co-operatives comprising Primary Agricultural Credit Co-operative Society (PACS), District Co-operative Banks (DCBs) and State Co-operative Banks in the short- and medium-term credit structure and Primary Co-operative Agriculture and Rural Development Banks (PCARDB) and State Co-operative Agriculture and Rural Development Banks (SCARDB) in the long-term credit structure assisted and guided by NABARD play a key role in not only purveying credit but also in mopping up local savings. As per the available data, Kerala State Co-operative Bank is the apex bank of the short-term credit co-operatives in the State with 14 District Co-operatives and about 2000 Primary Agriculture Co-operative Societies (PACS). According to the Kerala State Level Bankers‘ Committee (SLBC) data for 2017, there are a total of 1200 branches working in the cooperative banking sector in Kerala, of which 156 are in rural, significance of co-operative banks in banking activities at the grass-root level. Financial co-operatives differ from commercial banks and this fact is largely ignored by financial regulators, and financial co-operatives still operate with governance structures designed for small, community-based entities.

RATIONALE OF THE STUDY

Good governance calls for belief in systems, the systems which ensure continuity and faith. It also calls for the leaders to change and adapt to times and circumstances and enable the organization also to change to walk along with the needs and requirements of times. Indifference and stubborn attitudes do not produce good governance. It also is necessary to take proper care while taking decisions. Decisions taken should not be subjective and partial. All views, facts, and opinions should be taken into consideration before arriving at decisions. Good co-operative governance will ensure that board and management pursue objectives that are in the interests of co-operatives and members lead to effective monitoring of activities of societies; ensure efficient and effective use of available resources; reduce conflicts; and increase accountability and transparency in co-operatives The main pillars of Good Governance are transparency, accountability, predictability, participation, risk management, and control. Accountability is the capacity to call officials to account for their actions; Transparency entails low-cost access to relevant information; Predictability results primarily from laws and regulations that are clear, known in advance, and uniformly and effectively enforced; and Participation is needed to obtain reliable information and to serve as a reality check and watchdog for government action. Governance intervention should encourage the formation of social capital i.e., the stock of trust and information exchange at the base of civil society. A co-operative has a constitution [called by-laws] which establishes formally several organs of governance. These are: Annual General Meeting of Members [AGM] [also called General Body or Members‘ General Meeting] which elects a Board of Directors [BOD] [or Managing Committee], a Board of Auditors [BOA] [or Audit and Supervision Committee]. These two organs are independent of each other and directly answerable to the AGM. The BOD appoints a General Manager [GM], the chief executive officer, who is also supported by several business sub-managers. The GM is answerable to the BOD. The existing organisational design of most of the cooperative banks does not members, who are not necessarily professionals. The committee takes crucial business decisions including sanction of loans, investments, interest rate fixation, etc. which require a minimum degree of skill and expertise. It is necessary to evolve scientific staffing norms. As the business environment and economic climate change, fresh challenges come the movement‘s way – and the governance of an organization needs to change to match. Directors keep pace in a time of rapid change by keeping up to date. ―Organisations change all the time, as does best practice in co-operative governance,‖ says Emma Laycock, Co-operatives UK‘s advice manager. ―A neglect of governance weakens the framework of accountability and carries a risk to the co-operative. That‘s why regular governance reviews and training are essential for co-operatives – they help ensure the fundamentals of an effective member-owned business run smoothly.‖ Jim Booth, head of co-op development at the Scottish Agricultural Organisation Society (SAOS) agrees. ―As the business environment gets tougher, the quality and strategic capability of its board is critical for a co-op,‖ he says. ―Therefore continuous training is essential to ensure all directors have the skills and capabilities to meet the challenges. One of the best ways to improve a co-op‘s performance is to develop the skills and capabilities of its directors. Training of both new directors and for existing directors, as continuous professional development (CPD), is essential for success.‖ The training offered by co-operatives to those involved in its governance varies depending on the organisation‘s size, type, and sector; some offer internal training, while others use the skills of external experts. Co-operatives UK, for example, offers essential and advanced training for co-op directors and secretaries, plus an additional range of in-house training for boards, focusing on specific areas they would like, or doing governance reviews, audits, and health-checks. Co-operative training institutes in Kerala must offer a wide range of training, from interactive full-day workshops and board skill audits, to short high-impact e-Learning courses. Governance is a topic that is constantly evolving, and it is important that every single person within an organization understands what it means for a co-operative to be well-governed, no matter what their role. It is the only way to ensure that every aspect of the business is working in a truly cooperative way and that all members and employees are working towards the same goal. Everyone needs to understand the importance of governance and crucially what makes cooperative governance different. business works‖. Co-operative inductions – for both members and those involved in governance – are key, she says. ―If a co-op neglects that, new members and directors will bring their unquestioned assumptions about how business works and act on them with a very real danger that the co-operative culture will be undermined.‖ If the financial co-operatives are not following best governance practices, members will be dissatisfied. Dissatisfied members have a powerful option to discipline management or executive Board members of financial co-operatives in the form of withdrawing funds and business (Groeneveld and Llerwelln, 2012). Withdrawing deposits exerts a more direct threat to managers because when a depositor withdraws funds, the funding capacity of the financial co-operative is immediately reduced. By contrast, the sale of an equity stake in Shareholder Value (SHV) bank does not in itself influence the capacity of the bank, though the share price might fall, which would have the effect of raising the cost of capital and management also create a confidence problem for the bank. Thus, if equity stakeholders in SHV banks sell their ownership stake on the stock market, this does not remove assets from the control of the management of the banks, whereas the withdrawal of members‘ deposits at Stakeholder Value (STV) banks (viz. financial co-operatives) does.

The present study is concerned with investigating the role of cooperative governance in financial cooperatives in Kerala. In pursuing this aim the following objectives will be investigated: 1. To understand the governance issues of financial co-operatives in Kerala State 2. To assess the level of awareness among the co-operative members on good governance practices and to measure its extent and documentation of existing governance practices 3. To examine the impact of such governance practices on the performance of the co-operatives 4. To identify the factors that hinder good governance practice of financial co-operatives in Kerala 5. To formulate suggestions to the government machinery for issuing standard practices for improving the governance mechanism of financial co-operatives in

The study is descriptive and exploratory in nature as it attempts to describe the governance issues in the Service Delivery Mechanism of financial co-operatives by appraising its functioning and exploring the possibility of following the TQM Philosophy for evolving a better governance system. A multi-stage sampling method has been applied in this study.

Source: Statistical Abstract 2017-2018, Department of Cooperation, Government of Kerala

Source: Statistical Abstract 2017-2018, Department of Cooperation, Government of Kerala

Source: Statistical Abstract 2017-2018, Department of Cooperation, Government of Kerala

Source: Statistical Abstract 2017-2018, Department of Cooperation, Government of Kerala

Source: Statistical Abstract 2017-2018, Department of Cooperation, Government of Kerala

Source: Statistical Abstract 2017-2018, Department of Cooperation, Government of Kerala

Source: Statistical Abstract 2017-2018, Department of Cooperation, Government of Kerala

Source: Statistical Abstract 2017-2018, Department of Cooperation, Government of Kerala

financial cooperatives in Kerala and analyzed by Cross-sectional design, Confirmatory factor analysis, and structural equation modeling, the findings revealed a significant and positive relationship between cooperative governance practices and financial performance. Besides, there was also a significant and positive relationship between innovation and financial performance. However, the relationship between the ratification of management decisions and financial performance, and policy compliance and financial performance was not statistically significant. Overall, cooperative governance was a good predictor of financial performance.

• The alleged ―fraud‖ and ―irregularities‖ in the Delhi Nagrik Sehkari Bank Ltd reported by media on 28th July 2018; Uttarakhand Coop Bank's Rs 165 crore NPAs in loans for liquor contracts – kin of board members, reported by media on 23rd March 2018; the alleged Rs 100 crore scam in Yavatmal Urban Cooperative Bank reported in media on 6th March 2018; and the allegations of multi-crore fraud in Muslim Co-op Bank, Pune in 2017 are a few instances of inefficiency in the governance practices of co-operative banks and the other two co-operative bank scams in India viz. The Co-operative Bank Scam of Secunderabad occurred in 2002 and the Ketan Parekh — Madhavpura Mercantile Co-operative Bank (MMCB) scam that occurred in 2001 are a few instances of diversion of funds from the banking sector to the stock market, like that of the Harshad Mehta‘s securities scam in 1992. How the RBI allowed any bank without a Treasury division to operate in a debt market is a question that can be raised. In the case of co-operative banks, all the decisions of investment in securities are taken by the boards of directors which are elected rather than a full-fledged Treasury that would otherwise be run by professionals. In Kerala, the Social Workers‘ Cooperative Welfare Society at Karivellur (Payyanur taluk, Kannur), a cooperative credit society, was defrauded of nearly Rs. 3 crore by pledging imitation gold ornaments with the help of a society‘s own staff in 2017. The Thrissur-based Adat Farmers Service Co-operative Bank‘s multiple crore scam in 2017 is also an instance of inefficiency in the governance of co-operative credit societies. According to an estimate, irregular transactions of this bank have cost the bank a loss of Rs 31.75 crore. In the Thazhakara Branch of former governing body members and officials of Valapattanam Cooperative Bank were arrested in November 2016 in connection with the alleged fraud committed during 2006-2011. All these incidents reveal the inefficiency in the governance practices of financial co-operatives in Kerala and elsewhere in India. • ‗Cooperation‘ is a state subject under the Constitution governed by the respective State Cooperative Societies Acts. The cooperatives are at present under the control of state governments in all matters relating to registration, membership, election, financial assistance, loaning powers, business operations, loan recovery, and audit. Some aspects relating to banking activities are regulated and supervised by Reserve Bank of India/NABARD under BR Act 1949 and Banking Laws (Applicable to Co-operative Societies) Act, 1965. There is thus no clear demarcation of regulatory powers, which at times has resulted in cross directives from the controlling agencies, affecting the working of cooperatives and has also led to undermining the performance of cooperative banks. Duality of control between the state governments on the one hand and RBI/NABARD on the other has resulted in cross-directives, adversely affecting the working of the cooperative banks. • The grounds advanced by the Centre/RBI on excluding financial co-operatives in implementing demonetization, commenting that co-operative banks are not covered under core banking solutions that they don‘t strictly adhere to KYC norms and lack professional management should also be taken note of. • Members are the cardinal stakeholders of any co-operative as the growth of the organization solely depends on their patronage. Unfortunately, neither are the members aware of their role nor are the other stakeholders (management committee, employees, government, etc.) ready to recognize and respect this role. The words of Luzatti, a famous Italian cooperator, assume relevance here: ―A co-operative with vigilant members and a weak financial base will be preferred to a co-operative with casual members having a strong financial base.‖ There is an urgent need to institutionalize and strengthen arrangements for ensuring sound human resources and management practices in co-operatives covering recruitment, compensation package, re-skilling, career advancement, and social for the efficient functioning of financial co-operatives. • All over India, the recovery performance in cooperative banks continued to be far from satisfactory. • The RBI reports that the overall picture of the financial co-operatives is none-too-healthy. Its continued fragility does not augur well for the flow of credit to the rural sector. It is, therefore, necessary to assess the financial and other operational inputs required to restore the momentum of their growth on sound lines. The challenge of consolidating good governance practices in the financial co-operatives industry certainly is not exhausted with the dissemination of this research. New ideas and proposals will appear with the increasing adoption of such practices by co-operatives, producing more experience and successful practices that shall be incorporated in the successive versions of these model guidelines. It is, therefore, a dynamic process, that shall be built by all and for all.

There is a need to promote Cooperative governance awareness among the members of the public as the cooperatives are operating in Kerala for the welfare of their members who are also its beneficiaries. Helin (1988) that cooperative viability in most cases depends on membership size and capacity, and for a cooperative to get more memberships from the public, there must be public awareness. Some ways among others by which cooperative awareness could be propagated as investigated by G.E Probst 2001 include, lecturers, and seminars, workshops, etc. I.D.O. Chilokwu (2008) came up with various channels (media used in propagating cooperative awareness and these include: 1. Meeting 2. Newsletter 3. Personal contacts. The role of publicity in promoting cooperative awareness is the process of maintaining cooperative organization widely known through a public notice as a result of announcement advertising, or other measures, leaflets and due to the fact that cooperative cannot be organized in secret among a few people within a family or an • To enable them to know how to form and join cooperative • To enable them to know how to manage cooperative society. • To help them to know how to run the affairs of cooperative organizations. • To help them understand the cooperative laws, bye-laws, principles, and practice. • To give them a better understanding of cooperative principles and practices.

The International Cooperative Alliance is the global steward of the Statement on the Cooperative Identity – the Values and Principles of the cooperative movement. In 1995, the ICA adopted the revised Statement on the Cooperative Identity which contains the definition of a cooperative, the values of cooperatives, and the seven cooperative principles as described below. You can also consult the Guidance Notes on the Cooperative Principles and Values which give detailed guidance and advice on the practical application of the Principles to the cooperative enterprises.

The cooperative principles are guidelines by which cooperatives put their values into practice. Voluntary and Open Membership Cooperatives are voluntary organizations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination. Democratic Member Control Cooperatives are democratic organizations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary cooperatives, members have equal voting rights (one member, one vote) and cooperatives at other levels are also organized in a democratic manner. control, the capital of their cooperative. At least part of that capital is usually the common property of the cooperative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes: developing their cooperative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the cooperative; and supporting other activities approved by the membership. Autonomy and Independence Cooperatives are autonomous, self-help organisations controlled by their members. If they enter into agreements with other organisations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their cooperative autonomy. Education, Training, and Information Cooperatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their cooperatives. They inform the general public - particularly young people and opinion leaders - about the nature and benefits of co-operation. Cooperation among Cooperatives Cooperatives serve their members most effectively and strengthen the cooperative movement by working together through local, national, regional, and international structures. Concern for Community Cooperatives works for the sustainable development of their communities through policies approved by their members.

Good governance is at the heart of successful cooperatives (Harvey, 2017). Governance is a key determinant for growth, development, and poverty reduction (Dayanandan, 2013). Governance can also be seen as the instrument of the effectiveness of a society‘s institutions. If the institutions are appropriate and effective, the outcome should be good governance (Duncan, 2003). Social performance has, at its core, the idea that organizations should involve themselves in more than just an economic role in society and should Wakaisuka-Isingoma, 2017) Good governance principles such as legitimacy, participation, professionalization, accountability, transparency, honesty, integrity, and fairness that is normally associated with investor-owned organizations are also applicable in cooperatives. Because cooperatives have separate legal existence and are governed by the board of directors elected by share members in a general assembly. The participation of cooperative unions in economic activities is affected by their management capacity, experience, and access to credit. This is due to a lack of good governance practices (Dayanandan, 2013). Kyazze, Nkote, and Isingoma (2017) examined the relationship between cooperative governance and the non-financial performance of cooperative societies in Uganda. The findings revealed a significant and positive relationship between monitoring rights and social performance. Besides, there is also a significant and positive relationship between innovation and social performance. Dayanandan (2013) examined the impact of governance practice on the performance of cooperatives in Halaba special district, Southern Ethiopia. The study concluded that four predictor variables such as participation, accountability, transparency, and rule of law are found to be significant on the impact of cooperative performance. Three Assistant Lecturers of Moshi Cooperative University, Tanzania namely- Patrick, Obeid, and Njau (2014) - studied the topic ―Corporate Governance Practices and Performance of Cooperative Financial Institutions.‖ The study was conducted in the Kilimanjaro region. Specifically, it examined whether the cooperative financial institutions conform to corporate governance practices and establish a relationship between the corporate governance practices and the performance of cooperative financial institutions. It was found that there is a perfect positive relationship between the best cooperative governance practices and cooperative performance whether social, economic, or non-economic. From this theoretical analysis, it can be concluded that good governance practices have much impact on the performance of the co-operatives

COOPERATIVE GOVERNANCE PRACTICES

Factors that influence cooperatives to fail or succeed are explained differently according to different authors. However, people have not yet agreed on the conditions that clearly determine the success and failure of a cooperative (Hammond & Luiz, 2016).

Cooperative initiator and leadership are of paramount importance as to causing the cooperative to succeed or fail. To this end, a visionary, innovative, communicative, hardworking, business, and open-minded cooperative initiator or leader plays a very important part to make the cooperative succeed (Garnevska, Liu, & Shadbolt 2011).

Cooperative members play a big part in the success or failure of cooperatives. Against this backdrop, cooperative members who actively take part in decisions affecting the lives of their cooperative are very instrumental in making their cooperative a success (Garnevska et al., 2011).

is instrumental in the success or failure of cooperatives. From this perspective, the well-informed cooperative governance structure plays a pivotal part in making it succeed or fail (Chaddad & Cook, 2004). This has something to do with how cooperative members, leaders, and managers collaborate (Mardiasmo, Barnes, & Sakurai, 2001). In this regard, the functioning of cooperatives as business organizations exacts a democratic governance system. This entails that cooperative members actively take part in decisions affecting their cooperative lives (Nkhoma, 2011).

Cooperative management is an essential ingredient to the success or failure of cooperatives. According to Chloupková (2002), for cooperatives to be a success they should be organized on interests that are really homogenous. Literature disclosed that the management of cooperatives is instrumental in making them succeed or fail. Indicators, such as strong finance, good revenues, capacity in marketing, business planning and management lead to the well-being of cooperative (Garnevska et al., 2011).

Communication is an important tool as to the success or failure of cooperative. Communication between cooperative management and members is an important factor in running a successful cooperative (Makri, Skandalou, Manthou & Vlachopoulou, 2011). Inappropriate communication among members, the board of directors, management, and community as the primary information to clearly understand the cooperative value package (ARNALL, 2016).

Trust is crucial for any organization to succeed. For a cooperative to be successful, the trust-building process should always be strengthened(Simmons & Birchall, 2008).

The cooperatives demand among other things marketing skills in order to be able to function well (Hammond & Luiz, 2016). To this end, cooperatives may fail, because of members who are disengaged for the mere fact that they are not educated rather than motivated. Therefore, educated people are very instrumental in making cooperatives successful (Birchall, 2011).

Involvement of government is a crucial determinant that leads to the success or failure of cooperatives (Hammond & Luiz, 2016). In the western world, cooperatives are independent of government and they govern themselves according to the needs of their members (Johnson 15 & Shaw, 2014). Across less developed countries, it is the other way round, because cooperatives were mainly developed by States which do not prioritize cooperative members needs but rather put states interests first (Hammond & Luiz, 2016). This way of doing things by states in the third world has caused the failure of cooperatives in these countries (Johnson & Shaw, 2014). Governments' part should be to ensure that political, legal, and administrative platforms are in place to help cooperatives develop (Hammond & Luiz, 2016). Government entities should also help cooperatives to be awarded tenders and other business opportunities (Vladimirov, Simeonova-Ganeva, & Ganev, 2013). Therefore, cooperation with different partners can be crucial just in case there is no interference in cooperative businesses (Hammond & Luiz, 2016).

The cooperative sector in Kerala has been marred by large-scale financial irregularities, corruption, and loss. At the end of the 2017-2018 accounting year, 47 cooperatives were liquidated Out of 15,642 societies as of 31/03/2018, 3098 are dormant, 634 are under liquidation and more than 90% of Kerala cooperatives are running at loss. The Department of Cooperation, Government of Kerala must take steps to curtail these financial irregularities and losses. Accordingly, the following steps are recommended: 2. One-third representation in the director board can be given to women. 3. The cooperative legislation in the State should be amended to bring about wholesome changes 4. An adequate, low budget and high representativeness model of participation is essential for the success of financial cooperatives in Kerala State. 5. Strategic functions of cooperatives must be segregated from executive functions 6. Demutualization of ownership, management and administration 7. Members deliberations in General Assembly should be made mandatory 8. The minutes of the General Assembly shall be transparent – reporting all facts occurred and deliberations of members, including dissenting ones – and fully disclosed

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