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Establishing commodity cooperatives – perils of using funds to mobilize people

[Editor’s Note: This is part 4 of a 7-part series on commodity cooperatives in drought prone regions, originally authored as a pre-published paper by Dr. Trilochan Sastry (Academic Dean, IIM-Bangalore and social entrepreneur/activist). Dr. Sastry is shaping a new model for farmer owned-and-run commodity cooperatives in Andhra Pradesh through Center for Collective Development (CCD), a Hyderabad-based NGO he founded in 2003. Part 3 in this series was Establishing commodity cooperatives – social mobilization.]

Trilochan Sastry (Academic Dean, IIM-Bangalore)

Use of funds to mobilize people

The other mistake is to try to win over people by providing a subsidy, grant or incentive. Members will naturally join, sometimes in large numbers. The real work of establishing trust is glossed over. Later, if the incentives are withdrawn or siphoned off, we try to find out why things did not work out and why the cooperative failed. There are at least three potential problems with such grants. One, it attracts people for the wrong reasons, and worse, it attracts already established local leaders who are well trained in siphoning off funds. Once such leadership captures the cooperative, trust is lost and membership will dry up. The third potential problem is that such a model becomes difficult to scale up. Every new cooperative cannot be given a grant. Grants also become difficult to withdraw, and often gives control to the grant giver rather than to the members.

Since farmers are usually under huge debt at high interest rates, there is a lot of pressure on the promoting organization to provide loans to members. Sometimes the need for individual loans arises in a different context. For instance, when National Dairy Development Board (NDDB) started promoting cooperatives, they first decided to give loans to members and later withdrew them. The defaults had risen to unsustainable levels. Several other promoters have also faced this problem when giving out loans to individual members. Perhaps the reason is that in the current situation, loan defaults are common, whether to Banks or to promoting agencies. If in the early stage loans are given out, either there will be default, or the organization will morph itself into a collection agency losing its identity of a promoter of cooperatives. Trust from farmers is likely to be lost.

Crop loans to individuals for promoting agricultural commodity cooperatives are even more problematic. There is often no systematic regular recovery mechanism since the only time the farmer can repay is during the harvest – a one-time large repayment. There is a temptation to bypass the cooperative and sell the produce outside and pocket the money. Or perhaps, there are other pressing requirements in the family. There are very few known instances of promoting commodity cooperatives by giving out initial crop or other loans to individual members. Over the years, as surplus accumulates in successful cooperatives, loans are given to members, but it is from their own savings. Mulkanur Cooperative for instance does this. It is the use of external funds that creates a problem. Several farmers themselves acknowledge the problem caused by external funds.

However, there are exceptions to this rule. Quoting Shashi Rajagopalan (one of the pillars of India’s cooperative movement and former RBI/NABARD board member), “Mulkanur was an exception, perhaps because loan recovery mechanisms were very good with the founder himself going and sitting on the doorsteps even of relatives, to collect – attaching livestock and whatever else they could lay their hands on! Also because there was an in-built mechanism of ever increasing member stake with 5% of the loan being deducted towards share capital/thrift each disbursement.

The South India Federation of Fishermen Societies (SIFFS) in Kerala started its work by using a loan redemption strategy. Fishermen were indebted to money lenders and could not join the cooperative. Funds were given to members to repay their external loans. New members thus became indebted to the Cooperative. Though this eventually turned out well, this is perhaps the exception that proves the rule. Perhaps one reason is that unlike agricultural commodities which are harvested once a year, fish are caught and sold two to three times a week. Fish are also perishable and have to be immediately sold. There is a possibility of regular recovery. However, there are numerous instances where such loan redemption schemes resulted in huge defaults with the cooperative eventually having to close down.

Naturally the question arises, if members are indebted to money lenders and can sell their produce only to money lenders, how can successful Cooperatives be established?  One farmer asked the promoting organization “if I give my produce to the Cooperative, the money lender will be upset. My daughter is getting married later this year. If I go to him for a loan then, he will ask me to go and take a loan from the Cooperative. Will I get such a loan?” In the early stage – or even later – it is difficult to give such loans because of the lack of funds and the risk of default. If the promoting agency agrees to give to one member, there will a huge demand from almost everyone else.

Perhaps one way is to start with those who are willing to join – often a small number, sometimes the relatively better off. After one year of successful work, more members will join. There is also a need to allow new members to give only part of their produce. This allows farmers to hedge their risk. Experience shows that this strategy eventually works. Often it is the fear of fear (the fear of the money lender) that paralyzes some potential members. Once they test out the waters, they realize that they can indeed join as members and that there are few adverse reactions from money lenders. This realization usually takes between two to five years for many people. After all the money lender needs to lend to earn money. He eventually agrees to give a loan for the daughter’s marriage. Members eventually win control over the local economy.

In summary, the use of funds to mobilize people does not work well in the early stages for single crop commodity cooperatives.

Part 5 of this series continues here – Establishing commodity cooperatives – crucial role of member stakes.