Poor management practices, inadequate legal oversight, weak financial discipline and resource misappropriation are widespread issues affecting the majority of savings and credit cooperatives in the country. The lack of transparency, accountability and strategic long-term planning has further exacerbated the situation. These concerns were highlighted in the report of the Parliamentary Special Investigation Committee formed to study misappropriation of savings from different cooperative institutions across the country.

Although the probe panel was formed primarily to investigate the alleged involvement of Rastriya Swatantra Party (RSP) President and Former Home Minister Rabi Lamichhane in the misuse of cooperative savings, its finding has uncovered deeper systemic issues within Nepal’s savings and credit cooperative sector.

After receiving the report from the House of Representatives, police arrested former Deputy Inspector General (DIG) of Nepal Police, Chabi Lal Joshi, on September 22 on the charge of illegally transferring hundreds of millions of rupees from five cooperatives to the Gorkha Media Network which operated Galaxy 4K Television. Joshi, a director at Gorkha Media Network at the time, played a key role in the illicit transfers, according to the report.

The parliamentary committee, formed on May 28, was tasked with investigating misappropriation of cooperative scams worth billions of rupees, including those tied to Gorkha Media Network. Nepali Congress had long demanded a fair investigation, accusing Lamichhane’s involvement in these fraudulent activities. After a three-month inquiry led by CPN-UML lawmaker Surya Bahadur Thapa, the committee found that while Lamichhane was not directly involved in the transfer of funds from cooperative institutions, he, along with GB Rai (chair of Gorkha Media), Kumar Ramtel (board member), and Joshi, should be further investigated for their roles in misusing cooperative funds linked to Gorkha Media.

Huge Embezzlement

The parliamentary panel has uncovered staggering figures. According to its report, a total of Rs 87.89 billion has been embezzled from 40 savings and credit cooperatives. The investigation covered 22 problematic cooperatives and 18 others that had come under public scrutiny. The total liabilities of these cooperatives stand at Rs 87.89 billion, including the general public’s savings worth Rs 71.30 billion.

The report stated that there are slim chances of recovering interest on loans, investments in other ventures and non-banking assets, raising a crucial question: Will depositors ever get their money back?

The committee’s findings are detailed in a 1,124-page report that outlines the deep-seated issues within the cooperative sector. Chapter 8 of the report states that these cases fall under the purview of the Cooperatives Act, 2017, sections related to forgery in the Criminal Code, the Organised Crime Prevention Act 2013, and the Anti-Money Laundering Act, 2008. The committee has recommended dissolving cooperatives that are found to be operating outside their stated purposes.

The investigation revealed that several cooperatives engaged in fraudulent practices, with their promoters engaging in including fake marriages, fabricated property divisions, falsified accounts, bogus audits and fraudulent general assembly reports. They also created fake shareholders to syphon off savings. Among the 22 problematic cooperatives, 13 issued loans totalling Rs 21.37 billion in violation of legal provisions, while the 18 cooperatives under public scrutiny disbursed loans amounting to Rs 32.40 billion. Moreover, six of these cooperatives provided Rs 6.85 billion in loans to individuals and entities linked to the Gorkha Media Network. Altogether, 31 cooperatives disbursed loans totalling Rs 53.78 billion.

Read: Rabi Lamichhane to be remanded in custody for six days 

The investigation also uncovered that eight of the problematic cooperatives had misappropriated Rs 2.73 billion through dubious investments, while the 18 cooperatives under scrutiny had misappropriated an additional Rs 159.39 million. In total, Rs 2.88 billion was misused under the guise of investments.

These 40 cooperatives have a total share capital of Rs 3.81 billion and assets valued at approximately Rs 13 billion. During the study period, they deposited around Rs 2 billion in banks and financial institutions and disbursed loans amounting to Rs 53.78 billion. Additionally, their total investments during this period surpassed Rs 2.75 billion.

The investigation committee has classified the cooperatives into three categories: problematic cooperatives, those under public scrutiny (related to the Gorkha Media Network), and others. Among the cooperatives facing public scrutiny, six - Supreme, Sahara, Suryadarshan, Samanata, Swarnalakshmi and Sano Paila - have been unable to return deposits totalling Rs 6.32 billion. The committee determined that Rs 655.4 million was embezzled from these cooperatives and funnelled into the Gorkha Media Network.

Poor Governance and Indiscipline

The report indicates that 22 cooperatives, labelled as problematic by the government, still owe depositors Rs 42.81 billion. The findings reveal that some individuals have taken loans amounting to Rs 1.35 billion from these troubled cooperatives. The report suggests that liquidating the assets of these individuals could potentially resolve many of the issues at hand.

In certain cases, an individual held the position of chairperson for 20 to 25 years within the cooperative. There are instances where the same person secured loans up to 29 times without repaying previous ones. The report emphasises that savings from these cooperatives were invested in various ventures, frequently under the names of close family members, relatives or trusted associates.

Presenting the report in the meeting of the House of Representatives, Thapa said that a single company has taken loans ranging from Rs 880 to 890 million going against the cooperative principles. “Despite legal prohibitions, cooperative funds have been invested in private companies and individuals have misused cooperative money to acquire personal assets. These assets are often registered under the names of individuals who lack legal recognition. Although any deposit exceeding Rs 1 million requires source disclosure, billions have been deposited without disclosing their origins,” Thapa added.

The Cooperatives Act, 2017 prohibits lending to companies. However, the report reveals that a significant amount of money has been illegally transferred to businesses.

The cooperative sector in Nepal has long struggled with challenges, and recent scandals involving high-profile individuals have drawn renewed attention to these issues. The problems date back to the early 2000s when numerous cooperatives, especially in the Kathmandu Valley, abruptly shut down, leaving depositors unpaid as their operators vanished. At that time, around 150 cooperatives were reported to have misappropriated funds. Despite the severity of the situation, neither the Department of Cooperatives nor the National Cooperatives Federation has maintained comprehensive records of these incidents.

The Nepal Rastra Bank (NRB) had proposed amendments to the Cooperatives Act, 1992, to deal with the situation. It has proposed establishing an independent regulatory authority, requiring savings and credit cooperatives to join a Credit Information Centre and capping the deposits that they can accept. However, these recommendations faced significant opposition from influential cooperative leaders which ultimately led to the proposal being abandoned. Consequently, many regulatory recommendations remained unimplemented, allowing unregulated cooperative practices to thrive.

Committees Galore

The government has formed several study committees to seek suggestions to deal with the problem over the years. However, findings and recommendations of these committees were consistently ignored. A study led by Dr Yuba Raj Khatiwada in 2004, proposed forming a regulatory body that would grant the central bank oversight authority over cooperatives and called for amendments to the Cooperatives Act for stricter regulation. Despite presenting a clear roadmap for reform, the government dismissed these proposals.

Later that year, another committee reaffirmed many of Khatiwada-led study’s suggestions. But the suggestions went unheeded, again. In 2012 and 2013, subsequent committees, including experts from the Ministry of Finance and Nepal Rastra Bank, echoed earlier recommendations such as reorganising the Department of Cooperatives, implementing interest rate caps, conducting special audits for cooperatives with significant financial activities, and prosecuting individuals involved in financial misconduct. However, these recommendations also did not result in any concrete action.

In 2013, the government formed a probe commission under Gauri Bahadur Karki, which recommended a new ordinance to introduce a Cooperatives Act and Tribunal. Although this ordinance was initially enacted, it ultimately failed to become law due to changing political circumstances. More recently, a task force led by Dr Jaya Kanta Raut in April 2022 once again proposed reforms, including the establishment of a credit security fund, requiring cooperatives to publish white papers, creating a credit recovery tribunal, and placing cooperatives with transactions exceeding Rs 500 million under the regulation of the Nepal Rastra Bank.

The statistics regarding cooperative victims over the past decade are alarming. Police have arrested 669 individuals linked to cooperative scams, with approximately 1,540 still at large. In addition, 55,410 victims have lodged complaints with government agencies, although authorities suspect the actual number may be even higher.

The Thapa-led parliamentary panel has also stated in its report that the cooperative sector has been affected further by the removal of certain proposed regulatory provisions and the relaxation of others in the Cooperatives Act, 2017. “On one hand, there are complaints that regulatory bodies possess limited authority, restricted to imposing a maximum fine of Rs 500,000 and labelling cooperatives as problematic. This has resulted in a lack of direction in the regulation of the cooperative sector. Cooperatives should operate in a member-centred and member-controlled manner,” the committee said in its report. “However, the current openness and leniency in state regulation do not offer a clear roadmap for the sector's future. It is evident that the outlook is uncertain.”

The committee, however, has struggled to offer concrete recommendations for the recovery of savings from troubled cooperatives. Over the past year, victims have resorted to various forms of protest. Although the government has classified these cooperatives as problematic, the committee has not effectively addressed the issue of savings liabilities. The committee has suggested that if cooperatives encounter investment challenges due to mismanagement, state intervention is warranted, and in cases of minor losses, members should assist in covering the deficits.

The committee report indicates a 50% gap between the liabilities and assets of cooperative members in the declared troubled cooperatives, which restricts the committee's ability to propose viable options for the return of member savings.

Thapa said that the current situation is a result of ineffective regulation within cooperatives.

Need for Powerful Regulatory Authority

The Thapa-led committee has recommended forming a robust regulatory body. "The committee recommended establishing the Cooperative Authority as an autonomous organisation to oversee cooperative organisations, working directly in coordination with the related ministry and Nepal Rastra Bank as a secondary regulatory body,” Thapa said. “The authority should be empowered to issue cooperative operation licences, conduct regular regulations (including issuing rules or directives), supervise operations, enforce compliance with supervisory conditions and take action if these conditions are not met."

The parliamentary panel has recommended that the cooperative authority be granted the power to regulate, supervise, implement, and take action concerning all cooperatives engaged in savings and loans, as well as associations involved in financial transactions. "The board of directors of the Cooperative Authority should include subject matter experts and experienced individuals, with representation from the government of Nepal, Nepal Rastra Bank and knowledgeable professionals from the cooperative sector," the report said. "It is essential that the qualifications, selection, admission, promotion, and transfer of necessary expert personnel (including those in cooperative management, banking, chartered accountancy, and general management) be managed within this body, ensuring attention to institutional memory."

Probe Panel's Recommendations

* Establishment of Cooperative Authority as an autonomous organisation to oversee cooperative organisations

* The authority should be empowered to issue cooperative operation licences, conduct regular regulations (including issuing rules or directives), supervise operations, enforce compliance with supervisory.

* The board of directors of the Cooperative Authority should include subject matter experts and experienced individuals, with representation from the government of Nepal, Nepal Rastra Bank.

* Scrapping the National Cooperative Development Board and the Department of Cooperatives after the establishment of the Cooperative Authority.

* Cooperatives be classified based on their business activities and regulated accordingly.

* A stringent regulatory policy to ensure that audits of cooperatives are conducted by auditors listed in the Cooperative Authority, with monitoring of each cooperative at least once a year.

* The committee has proposed that the regulation of cooperatives should remain exclusively with the federal government.

The Thapa-led committee has also suggested abolishing the National Cooperative Development Board and the Department of Cooperatives after the establishment of the cooperative authority is formed.

Stating that cooperatives are currently categorised as savings and credit, multi-purpose, agriculture and dairy, among others, the committee has recommended that cooperatives be classified based on their business activities and regulated accordingly. “The report recommends implementing a stringent regulatory policy to ensure that audits of cooperative organisations are conducted by auditors listed in the Cooperative Authority, with monitoring of each cooperative at least once a year," it added.

The committee has proposed that the regulation of cooperatives should remain exclusively with the federal government. "According to Schedule 5, Sections (7) and (9) of the constitution, regulations and standards should be established by the federal government, while province and local governments should work to enhance the effectiveness of registration, record-keeping, and governance systems. Additionally, the regulatory framework should be reorganised, with a regulatory authority established at the federal level," the report states.

(The news report was originally publihsed in the  October, 2024 issue    of the New Business Age Magazine.)