«Rajesh Agrawal Indian Institute of Management Ahmedabad K V Raju Institute of Rural Management Anand K Prathap Reddy Institute of Rural Management ...»
A causal path analysis indicated that member-funds had significant total effects on member-control, member-usage and member-satisfaction. Member-control, in turn, had significant total effects on member-usage and member-satisfaction. Finally, member-usage had a significant effect on member-satisfaction.
Paddy and non-paddy cooperatives
Member-funds were strongly associated with member-control, member-usage, and membersatisfaction in paddy cooperatives. However, in non-paddy cooperatives, member-funds were significantly associated only with member-control. This was understandable, since rice milling required additional working capital. While refinance from the federal cooperative was available for on lending to agriculture; it was more difficult to obtain working capital finance for rice milling. Hence, member-funds had a more important role in paddy cooperatives.
Cooperative level analysis
The good and the bad cooperatives were compared on a number of financial indicators. Good cooperatives were associated with more member-funds (as a proportion of capital employed), higher levels of activity (sales and interest income), larger capital employed, and higher profitability (earnings before interest and tax to capital employed, and profit before tax to net worth).
Good cooperatives used, as a proportion of capital employed, more Non-Withdrawable Reserves, Non-Withdrawable Deposits, and Withdrawable Deposits. Good cooperatives used marginally less Member Share-Capital and Withdrawable Reserves.
Good cooperatives reported much higher growth rates of interest income, capital employed, net working capital, long-term capital, and net worth. But, in the growth rates of gross fixed assets and total sales, there was little difference between good and bad cooperatives.
Three categories of member-funds emerged from factor analysis.
Net individually-volunteered long-term funds (Individually-volunteered Funds6) was the excess of Withdrawable Deposits over Member Share-Capital. While Withdrawable Deposits were voluntarily provided by individuals, Member Share-Capital was, in almost all cases, provided by individuals because of State-legislated linking of individual borrowing to such capital.
Box on Mulukanoor about here
Collectively-volunteered long-term funds (Collectively-volunteered Funds) consisted of NonWithdrawable Reserves, Withdrawable Reserves, and Non-Withdrawable Deposits. All three originate from decisions collectively taken by members at the cooperative level.
Individually volunteered short-term funds (Short-term Funds) consisted of short-term deposits and saving accounts.
The first two categories of member-funds were positively associated with cooperative performance, while the third was negatively associated. Thus Member Share-Capital is negatively associated with performance, and other forms of funds positively associated with performance.
Member-funds had three distinguishing features; origin, permanence, and rate of return.
There are three categories of member-funds in terms of their origin. The first is externally compelled by linkage with the use of cooperative services. Member Share-Capital, for example, is linked to the member's borrowing limit by legislation. Members, who wish to borrow, have to bring in such externally compelled share capital.
The second category originates from cooperative level collective decisions. The creation of both Non-Withdrawable Reserves and Withdrawable Reserves is the outcome of such decisions. While, in these cases, collective capital is created, Non-Withdrawable Deposits represent individual capital created by a collective decision. Here, each member creates capital in proportion to the usage of the cooperative services. Member Share-Capital contributions, in excess of what is stipulated by legislation, as in Mulukanoor also fall in this category. Such cooperative level decisions are, to a substantial extent, based on voluntary decisions at the individual member level. In addition, the creation of reserves also pre-supposes profitable operations.
The third category of member-funds originates from individual member decisions. Withdrawable Deposits are created by individuals of their own volition.
Externally compelled funds are of lower quality than the funds volunteered by either collective or individual decisions. Member-Share Capital has negative representation in Individuallyvolunteered Funds that is positively associated with performance.
Non-Withdrawable Reserves have the highest degree of permanence, followed by Share-Capital and Non-Withdrawable Deposits. Withdrawable Reserves and Withdrawable Deposits have a lower degree of permanence. Short-term funds have the lowest degree of permanence, and are of lower quality than the more permanent funds. It is not surprising that Short-term Funds is negatively associated with performance.
This is the label we assigned to the factor. Naming is a difficult matter as T.S. Eliot cautions in The Naming of Cats.
To the individual member the returns on both Non-Withdrawable and Withdrawable Deposits are high, but the returns on Member Share-Capital are low. Reserves are not member-identified, while there may a perception that such funds generate adequate returns and indirectly benefit the member, a member would not have direct expectations. However, Non-Withdrawable Reserves lead to the creation of reserve funds invested outside the cooperative that enhance the perceived quality of the balance sheet. More importantly, such reserves also translate into buildings and other fixed assets owned by the cooperative, that add to the sense of permanence of the entity. Since the analysis did not directly incorporate rates of return, it is a speculation that members prefer higher returns/visible outcomes of funds.
Based on the origin, permanence, and return; the preceding analysis supports the following hierarchy of member-funds.
Non-Withdrawable Reserves and Non-Withdrawable Deposits represent the highest quality of capital; as an outcome of conscious collective decision-making, by their permanence, and by either high return or visible outcomes (reserve funds invested and buildings).
Withdrawable Deposits represent a somewhat lower quality of capital; as an outcome of individual decision-making, some degree of impermanence, compensated by high returns.
Withdrawable Reserves are of a lower quality, reflected in the ambiguous manner of entry, negatively (but not statistically significantly) in Individually-volunteered Funds and positively (and statistically significantly) in Collectively-volunteered Funds. While such reserves are the outcomes of collective decision-making, they lack permanence, are neither member-identified funds nor lead to visible asset creation.
Member Share-Capital is of low quality. They are provided by members to meet external requirements, are permanent, but offer a relatively low return.
Short-term member-funds are of the lowest quality.
Thus, member-funds in decreasing order of quality, are:
1. Non-Withdrawable Reserves and Non-Withdrawable Deposits
2. Withdrawable Deposits
3. Withdrawable Reserves
4. Member Share-Capital
5. Short-term Funds Member-satisfaction was dependent on member-usage, and member-control (excluding control through elections). Member-usage and member-control were, in turn, dependent on member-funds (with Collectively-volunteered Funds being important). Control over operations was less used if the cooperative grew satisfactorily. Cooperative performance was dependent on the growth of member-funds which in turn, was dependent on profitable performance which, ultimately, was driven by the aggregate member-funds. The possible empirical relationship is in Figure 2, this is broadly consistent with what we had hypothesized in Figure 1 but more complex.
Figure 2 about here
Two strategies for mobilizing funds emerged from the case analysis. In the 'mutual' strategy, a cooperative treated funds as a means to an end; where the end itself was such cooperative services as credit or paddy-processing. Funds were raised from the entire membership with an emphasis on collective decision-making on fund-raising. In the 'bank' strategy, a cooperative treated funds as an end in themselves. Funds were raised from a class of members, not necessarily using other cooperative services (credit or paddy-processing). The emphasis was on individually volunteered funds, although collective decision-making was also used.
The 'mutual' strategy appears to fit with an environment characterized by poor resource endowments/absence of competition. The 'bank' strategy would be more appropriate in environments characterized by rich resource endowments/competition. Both the strategies require good accounting systems, as a necessary but not sufficient 'hygiene' factor.
Both of them also require satisfactory cooperative performance. A cooperative following the 'mutual' strategy may be able to tide over a temporary bad patch better than a cooperative following the 'bank' strategy. This follows, since members in such a cooperative, are more strongly inter-linked with other cooperative services. Whereas, in a cooperative following a 'bank' strategy, depositors may shift loyalties at the first hint of trouble.
Four growth trajectories were conceived of. In all the four a cooperative is assumed to begin with some Member Share-Capital contributed as an act of hope. In Trajectory 1, additional member-funds are infused desirably early in a cooperative's life, by a collective decision. In Trajectory 2, there is high initial dependence on external finance but superior performance is used to build collective capital and attract funds from individuals. Trajectory 3, unlike Trajectory 2, does not place too much reliance on external funds. Superior performance leads to more member-funds. The rate of growth is slower than in Trajectory 2. In Trajectory 4 there is high dependence on external funds.
Performance is poor, member-funds beyond the minimum Member Share-Capital required to borrow are not forthcoming. Performance continues to be poor. Trajectory 4 is, alas, the one followed by many Indian multi-purpose cooperatives.
The 'mutual' strategy would imply Trajectory 1, while both Trajectories 2 and 3 are available with a 'bank' strategy. These trajectories indicate broad patterns of cooperative growth over a period of time, and finer variants can be conceived of.
Implications Cooperative level implications A cooperative can choose between the 'mutual' and 'bank' strategies. This choice is influenced by external environment considerations (resource endowments and degree of competition).
A cooperative choosing the 'mutual strategy' needs to develop collective decision-making processes.
Non-Withdrawable Reserves, Withdrawable Reserves, and Non-Withdrawable Deposits would be emphasized. While cooperative performance is important it need not precede some amount of fundmobilization.
A cooperative choosing the 'bank' strategy needs to make its financing schemes (primarily Withdrawable Deposits) attractive. This requires satisfactory cooperative performance, an emphasis on customer service, and attractive deposit terms. Some amount of collective decision-making leading to the mobilization of member-funds, may also be desirable.
For both strategies good and transparent accounting is essential. Audit certification has to be timely and credible.
Much of our focus has been on systems and processes, we have not looked at issues such as leadership. Mulukanoor certainly had a charismatic and popular leader, while the learning from Yendagandi is that a leader need not be a nice guy. Achanta illustrates that a cooperative can perform well even in the absence of a leader who stood out.
Box on Yendagandi about here Box on Achanta about here Implications for microfinance institutions While this study was in the context of cooperatives, we believe that these findings are of relevance to microfinance institutions. We will restrict our attention to those MFIs that use selfhelp groups (SHG). Our target in this paragraph are the 'promoters' of such SHGs. An SHG essentially uses what we have described earlier as the mutual strategy. The nurturing of processes that encourage collective decision-making within a group is very important. Equally important is for the members to be firmly in control over group decisions. A significant use of funds originating from group members and a lesser dependence on outside borrowings is also desirable. Is also important for accounting records to be current and for members to be kept informed, especially about the loan portfolio status. While what we are about to say is in the realm of speculation, we are convinced that the broad relationship between member-funds, membercontrol, member-usage, member-satisfaction, and (in this instance) SHG performance would not be very different from that found in the cooperative context.
We believe that such a relationship would also be found in the New Generation Cooperatives (NGCs). NGCs given their investment in further processing would resemble the paddy processing cooperatives in our study.
Policy implications In general, policy measures should not restrict cooperatives from raising funds on terms decided by themselves. Nor should these discourage or crowd out member-funds by adding a supply of cheap and readily available external funds, or funds unrelated to performance. Finally, policy measures can promote reliable third-party certification of financial performance.
While the interest rate structure on rural cooperative deposits is not regulated by the central bank, in some states a structure is imposed. This seems unnecessary.
Borrowing limits, if they have to be imposed by an external agency, may be linked both to MemberShare Capital and also to Non-Withdrawable Deposits (which are quasi-share capital in nature and can offer higher returns).
Externally provided refinance may be made less attractive. Linking of refinance to member-funds and the use of a mix of differential interest rates and limits to provoke cooperatives to raise memberfunds, is strongly desirable.