Dean's Office Official Model Question Paper

Definition and Principles of a Cooperative Society

A cooperative society is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.

Key ICA Principles:

1. Voluntary and Open Membership: Cooperatives are voluntary organizations open to all persons able to use their services and willing to accept membership responsibilities without discrimination.
2. Democratic Member Control: Cooperatives are democratic organizations controlled by their members, with equal voting rights (one member, one vote).

Primary Cooperatives vs. Cooperative Unions

Role of the Supervisory Committee in a Cooperative

The Supervisory Committee (Lekha Samiti) is an independent oversight body elected directly by the General Assembly to perform internal audit and check governance integrity:

1. Internal Audit & Financial Verification: Regularly inspects books of accounts, cash balances, loan files, and asset registers to verify compliance with the Cooperative Act and bylaws.
2. Governance Oversight: Ensures the Board of Directors acts within its delegated authority and reports financial irregularities directly to the General Assembly.

Concept of Patronage Refund

A Patronage Refund (Sanrakshak Kosh / Munafa Pratiphala) is the distribution of cooperative operating surplus back to members in direct proportion to their volume of transactions or usage of cooperative services during the fiscal year, rather than on the basis of share capital owned. This reflects the principle that member patronage, not capital ownership, generates cooperative value.

Major Challenges Faced by SACCOs in Nepal

1. Governance & Asset-Liability Mismatch: Concentration of loan portfolios in illiquid real estate and loans to board directors (swartha jodiyeka karja), resulting in liquidity freezes when depositors demand withdrawals.
2. Inadequate Prudential Regulation: Fragmented local/provincial regulatory capacity lacking specialized prudential tools (like CAMELS ratings and deposit insurance) comparable to central bank supervision.

The 7 ICA Principles and Rural Economic Empowerment

The 7 Statement on the Cooperative Identity principles established by the ICA (Manchester, 1995) govern modern cooperative management:

1. Voluntary and Open Membership: In rural Nepal, this enables smallholder farmers and marginalized women to pool resources without gender or caste barriers.
2. Democratic Member Control: Ensures equal voice (one member, one vote), preventing elite capture of community funds.
3. Member Economic Participation: Members contribute equitably to capital and allocate surpluses toward common reserves and patronage dividends.
4. Autonomy and Independence: Keeps rural organizations self-reliant even when receiving governmental subsidies or donor grants.
5. Education, Training, and Information: Educates farmers and members on financial literacy, agricultural best practices, and cooperative leadership.
6. Cooperation among Cooperatives: Encourages dairy, tea, and credit cooperatives to form apex federations for marketing leverage.
7. Concern for Community: Directs cooperative surplus into local clinics, drinking water schemes, and community disaster relief.

Provisions of the Cooperative Act, 2074 (2017)

1. Capital Formation and Share Limits:

• No individual member can hold more than 20% of the total share capital of a cooperative, preventing corporate monopolization.
• Prescribes minimum paid-up share capital requirements based on geographic and functional operating scope.

2. Statutory Reserve Funds:

• General Reserve Fund: At least 25% of annual net profit must be credited to the General Reserve Fund before dividend declaration.
• Cooperative Promotion Fund: Allocates statutory percentages to the central cooperative development fund.
• Maximum share dividend (Lavyansha) is capped at 18% per annum.

3. Credit Operations and Risk Management:

• Mandatory establishment of Loan Loss Provisions (Karja Noksani Byabastha) against overdue loans.
• Restricts loans to non-members and caps credit-to-deposit and single-borrower limits to maintain sound institutional liquidity.

Cooperative Governance and Resolution of Agency Problems

1. Governance Architecture:

• General Assembly (GA): Supreme governing body where all members hold equal voting power.
• Board of Directors (BOD): Elected policy-making body responsible for strategy and oversight.
• Account Supervisory Committee: Directly elected by GA, independent of BOD, to conduct continuous internal audit.
• Management Team: Professional staff headed by the CEO/Manager executing day-to-day operations.

2. Resolution of Agency Problems:

• In Investor-Owned Firms (IOFs), shareholders (principals) and customers (users) are distinct, leading managers to maximize profit at customer expense.
• In Cooperatives, members are simultaneously the owners, controllers, and customers (user-owner-benefit duality). This alignment drastically minimizes predatory pricing and agency exploitation, as managers are evaluated on member service quality rather than purely speculative capital extraction.

Case Analysis: Resolving Cooperative Liquidity Crisis and Governance Failure

1. Diagnosis of Root Failures:

• Severe Asset-Liability Mismatch (ALM): Channeling short-term public deposits (savings/term deposits) into long-term illiquid real estate.
• Insider Lending and Conflict of Interest: Violating the Cooperative Act, 2074 by disbursing unhedged loans to board directors and affiliated businesses without collateral inspection.
• Absence of Liquidity Buffers: Failure to maintain mandatory statutory liquid assets (10–15% in cash and bank reserves).

2. Immediate Crisis Mitigation Measures:

1. Phased Withdrawal Scheduling: Negotiate structured withdrawal caps with large institutional depositors while fulfilling small household withdrawal requests to restore confidence.
2. Liquidity Infusion via Collateral Liquidation: Secure emergency bridge liquidity against verified physical assets through the National Cooperative Bank Limited (NCBL).
3. Restructuring and Recovery Enforcement: Issue prompt legal recovery notices to defaulting insider borrowers under Section 79 of the Cooperative Act, invoking asset freezes.

3. Long-term Regulatory Compliance Strategy:

• Adopt the PEARLS Financial Performance Monitoring System to ensure institutional capital exceeds 10% of total assets and delinquency remains below 5%.
• Integrate operations with the Credit Information Bureau (CIB) and implement deposit guarantee schemes to safeguard small savers.