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«Rajesh Agrawal Indian Institute of Management Ahmedabad K V Raju Institute of Rural Management Anand K Prathap Reddy Institute of Rural Management ...»

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The audit function, in most states in India, is carried out by the Registrar of Cooperatives. Auditing involves significant work, and inadequately-staffed or inadequately-trained auditors lead to delayed auditing and auditing of unsatisfactory quality. Strengthening the audit department, allowing the entry of reputed private audit firms, and imposing penalties on cooperatives which violate audit provisions, are some of the measures required.


This research represents the outcome of the meeting of two worlds, the world of corporate finance and the world of organizational behaviour, that seldom meet. The 'bottom-line' of this research is that member-funds have a central role in enhancing cooperative performance. Funds voluntarily provided, either as an outcome of collective cooperative level decision making or of individual level decisions are of high quality. Externally compelled member-funds are of low quality, as are shortterm member funds.

Agrawal, R. (1992), Why is internal finance important for cooperatives?, Chartered Accountant, 66, September, 188-193.

FAO and COPAC (1992), Research design for a study of successful capital formation strategies for agricultural service cooperatives in developing countries, (Draft Proposal), Rome: Food and Agriculture Organization.

Furubotn, E.G. and Pejovich, S. (1973), Property rights, economic decentralization, and the evolution of the Yugoslav firm, 1965-1972, Journal of Law and Economics, 16, 275-302.

Jensen, M.C. and Meckling, W.H. (1979), Rights and production functions: an application to labor-managed firms and co-determination, Journal of Business, 52, 469-506.

Phansalkar, S.J. and Srinivasan, R. (1992a), Residual claims in cooperatives: design issues, IRMA Symposium on Management of Rural Cooperatives, Anand: Institute of Rural Management.

Phansalkar, S.J. and Srinivasan, R. (1992b), Residual claims in cooperatives: design propositions.

IRMA Symposium on Management of Rural Co- operatives, Anand: Institute of Rural Management.

Reddy, K.P. and Sekhar, R.C. (1992), Civic control ambience and collective controls in cooperatives, IRMA Symposium on Management of Rural Cooperatives, Anand: Institute of Rural Management.

Figure 1 Hypothesized Relationship

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Boxes Mulukanoor A conscious decision to raise member funds Like other agricultural cooperatives, Mulukanoor initially raised funds from its District Central Cooperative Bank (DCCB) for on lending to its members. It later switched over to a commercial bank, as the DCCB was unable to meet its financial needs.

A ratio of share capital to borrowing of 1:10 was stipulated for both the cooperative's borrowing from the DCCB/commercial bank and for member borrowing from the cooperative. Mulukanoor realized that it did not have the capital to perform any other activity. It also realized that its role was limited strictly to that of an intermediary - just passing on loan disbursements from the bank to members and loan repayments from members to the bank. The capital needed for trading in fertilizers was initially raised on a short-term ad hoc basis but this was found unsatisfactory. This led to a discussion, and a broad consensus among members was reached to strengthen the capital base of the cooperative.

As most of the members could not make contributions in cash, it was decided to adopt the following two methods which authorized the cooperative to make deductions at source while making disbursement of loans to members.

The first of these two was to raise the ratio of share capital to loan amount from 1:10 to 1:5 at the level of members, thereby reducing the borrowing limit of members. At the same time the cooperative continued to borrow at the previous ratio. This ensured that the cooperative had enough working capital.

The second was to check off 5% of the seasonal crop loan amount from every member of the cooperative once a year, as a Non-Withdrawable Deposit. (Members borrow twice a year for the Kharif and Rabi season crops). It was also decided that the cooperative should pay market rate of interest on these deposits The interest was reinvested in this deposit account. It was also agreed that this deposit could be withdrawn only when an individual ceased to be a member.

With relatively large sums as deposits, members were tempted to withdraw deposits and re-join as new members. To prevent this, the bylaws were amended. A member, who so withdrew, could rejoin after a five-year gap and even then had to re-deposit the amounts withdrawn. Member opportunism has been sufficiently deterred by this stipulation.

The rate of interest on Non-Withdrawable Deposits has been around 3-4 percent higher than that on three-year Withdrawable Deposits. On such deposits, as well as on savings accounts, Mulukanoor has used the interest rate structure binding on the urban (but not on the rural) cooperatives.

Yendagandi-You do not have to be nice One member perhaps best summarized the cooperative President's role, "His greatest service to us was being strict."

Achanta-Systems can substitute for leadership In literature, it is usual to ascribe the success of a cooperative to a visionary leader or an aggressive chief executive. In the case of Achanta neither of these appear as obvious explanations for its success. Each election produces a new set of elected members to manage the cooperative. The members of the cooperative as well as the employees ascribe the success of the cooperative to very strong operating systems. These operating systems have come been maintained through an acculturisation process. For instance, the first president of the cooperative had a reading room set up just outside the banking hall. The argument was that if more members hang around, the chances of fraud and corruption are lesser. This “control system” continues to this date.

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