Root Cause of Cooperative Issues: Inept Government Offices; Disciplinary Action Recommended for Over a Dozen Employees

May 27, Kathmandu – The government-appointed commission tasked with investigating irregularities in cooperatives concluded that the root of the problems lies in the ineffectiveness of government mechanisms.

Finding that certain government officials violated laws and complicated cooperative issues, the commission held 19 employees, including registrars from the Cooperative Department, accountable.

Despite the presence of multiple regulatory bodies, no single agency effectively performed its duties, enabling cooperative operators to misappropriate depositors’ funds, the commission found.

The commission has recommended disciplinary action against these 19 civil servants for failing to act and instead engaging in unlawful activities that worsened the cooperative sector’s problems.

Among those recommended for action are former Cooperative Department registrars Tokaraj Pandey, Rudra Prasad Pandit, Lila Prasad Sharma, Gokul Prasad Bohora, Jhalmara Adhikari, Acting Registrar Shankar Raj Joshi, Deputy Registrar Khimananda Acharya, and Sashikumar Lamsal. The government has been advised to conduct thorough investigations and take suitable measures.

Other implicated employees include Raghubansh Kandel, Binod Kumar Paudel, Sandesh Prasad Joshi, Menuka Ghimire, Surendra Raj Paudel, Khomraj Bist, Keshav Bahadur Thapa, Rajendra Nepal, Basudev Bhattarai, Niroj Ghimire, and Tolraj Upadhyay. Further probe and disciplinary action are recommended for them as well.

These officials were involved in granting approvals for service centers, mergers, and demergers. The commission found that not only district and division cooperative offices but also the Cooperative Department and activists within the cooperative sector misused cooperative principles and business conduct.

The commission uncovered that cooperative registration granted approval to operational areas nationwide without proper analysis of feasibility, necessity, financial capacity, or infrastructure. Approvals for expanding operational areas and opening branch offices were issued arbitrarily by regulatory bodies.

Cooperative operators have treated cooperatives as fraudulent businesses. Although the Cooperative Act 2074 (2017) and Regulations 2075 (2018) are in place, employees and officials of regulatory bodies have registered institutions, expanded operational areas, opened service centers and branches, and granted approvals contrary to accepted cooperative principles.

The commission noted that unclear division of authority among federal, provincial, and local levels within the regulatory structure has led to ambiguous regulation. Monitoring, inspection, and supervision have not been effective. File and data management as well as institutional capacity in the Cooperative Department and related agencies are inadequate.

There is evident undervaluation of legal provisions and disregard for cooperative principles in the registration, operational area expansion, and mergers of cooperative institutions.

Despite the operation of the COPOMIS system, incomplete, outdated, and unreliable data have weakened policy formulation and regulatory functions, the commission reported.

The absence of an integrated, reliable, and real-time information system has made it difficult to identify and control problematic cooperatives.

Financial irregularities detected include misappropriation of resources by directors and officials, excessive loan disbursement, maintenance of dual accounts by the same institution, insufficient loan loss reserves, and lack of transparency.

Cooperatives engaging in activities outside their designated sectors, unhealthy competition, and unproductive investments have increased institutional risk.

The commission has advised immediate management intervention in troubled cooperatives, suspension of new registrations and service center openings, and implementation of policies promoting mergers for cooperatives with up to 1 billion NPR in transactions.

Strict penalties for misuse of savings, risk-based supervision, mandatory digital accounting, setting term limits for directors, and regulatory interventions are key recommendations to reform cooperatives.

Recommendation to Categorize and Regulate Cooperatives

The commission recommended that the government regulate cooperatives by classifying them. Large cooperatives should initially be brought under regulatory oversight, with medium and small ones gradually included.

For small cooperatives, the commission suggests maintaining institutional governance, developing management information systems, collecting financial reports, publishing regular progress updates, and verifying the qualifications of directors and employees.

The commission advocates classifying cooperatives into large, medium, and small based on their transaction volumes.

Proposed classification includes large cooperatives with investments exceeding NPR 1 billion, medium with NPR 250 million to 1 billion, and small with investments up to NPR 250 million.

Responsibility for monitoring small cooperatives would be assigned to municipalities, wholesale lenders, and cooperatives’ unions. Strict enforcement of audit requirements, regular general meetings, self-regulation standards, and submission of supervision reports annually to unions and regulatory bodies are recommended.

Medium and large cooperatives should be regulated by a National Cooperative Regulatory Authority established through legal provisions. These cooperatives would be required to regularly submit progress reports and undergo on-site supervision as necessary.

The commission proposed that Nepal Rastra Bank should support this authority in regulating large cooperatives with responsibilities aligned proportionally in the Cooperative Act and the Rastra Bank Act.

The central bank must maintain records of inspection methods, procedures, and skills for cooperatives to enhance supervisory capacity of regulatory authority staff.

The commission also advised establishing standards for progress measurement and institutional evaluation based on cooperative types, objectives, services, and local conditions.

Suggested Implementation Strategy

To effectively amend and enforce the Cooperative Act 2074, the commission has devised a phased action plan. The first phase involves an immediate comprehensive audit and classification of cooperatives nationwide.

The plan emphasizes identifying high-risk cooperatives for special oversight and creating a cooperative database to enable management interventions for improvement.

The commission set a deadline of one year for departmental action against regulatory employees who aided malpractice.

The second phase, over two to three years, involves revising the Cooperative Act, implementing digital accounting, member records, and loan management systems, and strengthening the regulatory bodies’ workforce, technology, and budgets. It also recommends policies to reduce unnecessary competition through cooperative consolidation.

The third phase, over five years, aims to link cooperatives with production, agriculture, and energy sectors to play an active role in local economic development, develop cooperatives as social enterprises, and promote adherence to international cooperative standards.