Cooperatives and Self-Help Groups: Acts, NABARD and SHGs

A cooperative is a voluntary association of persons who own and run an enterprise for their own benefit, where every member has one vote whatever the size of his shareholding. A self-help group is smaller and informal: ten to twenty poor people of a similar economic background who save a little every week, lend to each other from that pool, and later borrow from a bank as a group. The two together form the base of rural credit in India, and questions on them come from the dates of the Acts, the levels of the credit structure, the bodies that lend and the schemes that organise the groups.

The cooperative movement: the dates that matter

The Act of 1904 followed the recommendation of the Famine Commission and of Frederick Nicholson, who had studied the land banks of Europe, and it was modelled on the German Raiffeisen societies of village credit. Cooperation is a State subject, entry thirty-two of the State List, which is why each State has its own cooperative societies Act; a society whose members live in more than one State is registered under the central Act of 2002.

The 97th Amendment

The Constitution (Ninety-seventh Amendment) Act, 2011 did three things. It added the words cooperative societies to Article 19(1)(c), so that forming a cooperative is part of the fundamental right to form associations. It inserted Article 43B in the Directive Principles, asking the State to promote the voluntary formation, autonomous functioning, democratic control and professional management of cooperative societies. And it inserted a new Part IXB, Articles 243ZH to 243ZT, which laid down rules on the number of directors, reservation of seats, the five-year term of a board, the audit of accounts and elections. In Union of India versus Rajendra N. Shah, decided in 2021, the Supreme Court struck down Part IXB so far as it applies to cooperative societies within a State, because an amendment touching a State subject had not been ratified by half the State legislatures, but upheld it for multi-state cooperative societies. Article 19(1)(c) and Article 43B were not disturbed.

The cooperative credit structure

Short-term credit flows through three tiers. At the village level stands the Primary Agricultural Credit Society, which lends directly to the farmer; above it the District Central Cooperative Bank; and at the top the State Cooperative Bank, which draws refinance from NABARD. Long-term credit has two tiers, the State Cooperative Agriculture and Rural Development Bank and its primary units. Urban areas have urban cooperative banks, which the Reserve Bank regulates along with the state registrar, a dual control that the Banking Regulation (Amendment) Act, 2020 tightened in favour of the Reserve Bank.

NABARD

The National Bank for Agriculture and Rural Development was set up on 12 July 1982 on the recommendation of the Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development, known by its initials CRAFICARD, which B. Sivaraman chaired. Its head office is in Mumbai. NABARD does not usually lend to a farmer; it refinances the banks that do, inspects cooperative banks and regional rural banks, runs the Rural Infrastructure Development Fund, and promotes self-help groups and farmer producer organisations.

Cooperatives that changed the economy

The dairy cooperative of Kaira district, registered at Anand in Gujarat in 1946 and known by the brand name Amul, built a chain in which the village society collects the milk, the district union processes it and the state federation markets it. Verghese Kurien, called the father of the white revolution and the milkman of India, carried that model to the country through the National Dairy Development Board, set up at Anand in 1965, whose Operation Flood began in 1970 and made India the largest producer of milk. The same form worked in fertiliser through IFFCO, founded in 1967, and KRIBHCO, and in handloom, sugar, fisheries and credit.

Self-help groups

A self-help group has ten to twenty members, usually women, from one village and one economic class. The group meets weekly, each member saves a fixed small sum, the pooled money is lent within the group at a rate the members set, and the records are kept by the members themselves. The group is not registered under any Act, which is its strength, since the rules stay simple and the recovery rests on the pressure of neighbours. NABARD began the SHG-Bank Linkage Programme as a pilot in 1992, linking a few hundred groups to banks, and it has since become the largest microfinance programme in the world by the number of households it reaches. Lending to a group saves the bank the cost of judging each borrower, and lending to women has proved safer and more productive.

Schemes build on the same base. The Deendayal Antyodaya Yojana, National Rural Livelihoods Mission, of the Ministry of Rural Development organises rural poor women into groups, gives each a revolving fund and a community investment fund, federates the groups into village and cluster organisations, and arranges bank credit with interest subvention. Kudumbashree in Kerala, begun in 1998, Jeevika in Bihar and the earlier Swarnajayanti Gram Swarozgar Yojana belong to the same family. Outside India, the Grameen Bank of Bangladesh, founded by Muhammad Yunus, who won the Nobel Peace Prize in 2006, showed what group lending to the poor could do. In India the companies that lend to such groups are regulated by the Reserve Bank as microfinance institutions, following the recommendations of the Malegam Committee.