Cooperatives leave Nepalis high and dry

On 2 January 2023, Sita Adhikari (pictured above) was sitting in Narayan Chaur in Kathmandu, worrying about the Rs200,000 that she had deposited at Oriental Cooperative. She had saved the money to see through her old age, but it is now all gone.

“I think I will die without getting that money back,” she said, chin resting on the palm of her hand.

Adhikari is originally from Nuwakot, and spent her life alone and without any support. She was married in 1951 when she was 11 and her husband died three years later. In 1959, she came to Kathmandu, leaving everything behind. Now, she works in a household in Naxal.

She had received Rs100,000 as part of her husband’s property, adding another Rs100,000 that she had saved and deposited the total amount in Nepal Bank Limited. After a kin told her that the Oriental would provide her a better interest rate, she deposited her money there.

By the time she learned that this was a bad decision, it was already too late. When she needed money for medicine, she reached out to the cooperative. But the branch office was locked up. She has spent a decade since trying to get that money back.

“It was all I had, the crooks stole it from me,” she added.

Thousands of other depositers had also put their money at Oriental Cooperative, operated by a Sudhir Basnet, who is absconding.

According to the office of Cooperative Management Committee, about Rs1.5 billion deposited by about 4,250 people at Oriental remains in limbo. Khagendra Kafle, chair of a victims’ committee, says that the depositors have been struggling financially and a dozen of them have already died.

Chhetra Dhanchhawa of Bhaktapur had deposited Rs2.6 million at Basnet’s cooperative. The money was to take care of her son Bishnu who cannot speak or walk. she died at age 83 in 2021, the loan her family took for her funeral rites remain unpaid, and Bishnu is being looked after by his niece (pictured above).

Devendra Prasad Pokharel, chief of Kathmandu Metropolitan City’s Cooperative Department, meets dozens of depositers who have lost all to collapsed cooperatives daily.

“Some have warned they will self-immolate at the department’s office if they do not get their money back,” he says. “It is so depressing I feel like quitting my job right now.”

After the department receives complaints, it summons cooperative operators for a discussion. If the operators pay back the money within a certain period of time, the case gets closed. If not, the department sends a letter to the police for an investigation.

“So far, we have already sent 2,800 complaints against 56 cooperatives to the police,” Pokharel adds. And of the 1,600 financial institutions in Kathmandu alone, complaints have been filed against 125.

Binda Budhathoki, who runs a retail shop in Balkot has Rs40,000 still stuck in Nagarik Bikas Cooperative. On 1 February its officials were asking depositors to visit after a month because it had a cash crunch.

Between July and December, the Cooperative Department under the Ministry of Land Management and Cooperative received 451 complaints against cooperatives. Registrar Rudra Prasad Pandit said, “We take complaints if it is under our jurisdiction, if not, we suggest they visit the authorities concerned in local units and provinces.”

The Cooperatives Act 2017 has divided the work related to cooperatives’ registration and monitoring among the department, and provincial and local governments. There is no concrete data on how many cooperatives have not paid their clients’ money.

Meen Raj Kandel, chair of Rastriya Sahakari Mahasangh, the umbrella association of cooperatives, says that as many as 32,000 cooperatives across the country have deposits worth Rs700 billion. But because of the fraud committed by some of them, there is widespread loss of faith in cooperatives.

“On the one hand, the country’s financial outlook is grim, and the cooperatives have not been able to get returns on their investment,” he said. “On the other hand, all depositors have been thronging to cooperatives to ask for their money back. This is creating problems.”

The problem is not new, it has just got worse. In 2013 the government formed a probe commission to investigate cooperatives after many people were left high and dry. It found the operators themselves had been taking large amounts of loans and not repaying the principal and interest for years.

According to the commission’s report, 22,170 depositors had yet to receive a total of Rs7,607,995,000 from cooperatives.Including interest, the sum crosses Rs10 billion. That was ten years ago, and the problem has gotten worse since most of the guilty were never punished.

The report recommended that cooperatives should be regularly monitored, there should be strong laws to control unruly financial and managerial decisions, and registrations be stopped for new cooperatives. In addition, it also suggested that operators should not invest without collateral and all financial transactions be done through banks or financial institutions. None of this was ever implemented.

Lalupate Cooperative in Khotang collapsed without refunding its customers’ savings. The Dhangadi branch office of Shiva Shikhar Multipurpose Cooperative shut down without refunding depositers. The Credit Information Bureau has blacklisted 11 cooperatives just in the current fiscal year.

Gauri Bahadur Karki, chair of the probe commission, blames greed and mismanagement. “The business of collecting money from the public and mobilising it in real estate or other business by a single individual or a family has increased the risk of theft of public’s property, this is a business that should have been strictly regulated,” he said.

Civil Cooperative, for example, used at least Rs5.67 billion from depositers, invested it in real estate and other iffy sectors and never refunded it. Investigation has shown that the cooperative loaned Rs1.32 billion to former chair and adviser Ichha Ram Tamang’s Civil Homes without securing any collateral. Cooperatives issued loans again and again without recovering the previous credits.

The Department of Cooperatives did issue guidelines related to liquidity, investment, utilisation of savings, and institutional good governance from time to time, but it has failed to monitor and take action against the cooperatives that show reluctance to implement them.

There is a provision that the cooperatives should maintain liquidity up to 15%, and invest more than half of the total credit in the production-oriented business in order to minimise the investment in the real estate, but this has never been enforced.

Rudra Prasad Pandit says cooperatives and real estate businesses have become co-dependent. In fact, cooperatives start facing problems when cracks appear in the real estate sector. Real estate transactions are now down to half in the last six months of the current fiscal year compared to last year.

Last year, 394,307 properties were purchased and sold, but the number is now barely 189,937. This means cooperatives that had speculated on land have not been able to recoup the money. Complaints lodged at the Cooperative Department show that almost all the cooperatives invested in real estate plotting or land transactions.

Savings schemes and cooperatives have become the tool of money laundering due to the lack of regulation. Economist Keshav Acharya says that cooperatives that should have been established for the public good have been infiltrated by the land mafia who collect the wealth of the public and gamble on real estate.

The 2013 probe committee states in its report that the operators who were found involved in misappropriation responded that they were unaware of the laws. ‘The cooperatives should have been opened after thorough research. There is no one to formulate operation rules,’ the report states.

For instance, investigation into Oriental Cooperative found that Basnet had taken most of the loans in the name of fake depositers, even establishing more than half-a-dozen sub-cooperatives in order to collect money from the public.

The Auditor General’s report in 2023 notes that many cooperatives have failed to establish a system to identify suspicious transactions and to conduct a detailed study of the high and abnormal financial dealings from their own members. In addition, cooperatives have become the hotbed for people blacklisted by banks and other financial institutions.

In fiscal year 2021/22, of the total 2,401,714 financial transactions above Rs1 million, 274,113 were done by cooperatives. And, although the details of all transactions above Rs1 million and all suspicious transactions should be sent to the Financial Information Bureau, the implementation is lacking.

Adds Dipak Raj Pokharel of the Money Laundering Prevention unit, “There is little investigation into suspicious transactions through cooperatives.”

A high-level task force led by the National Planning Commission in 2066 concluded that cooperative organisations were a risk-factor for the economy. ‘A great disaster could be on the cards due to the weak monitoring/regulatory organisational system and legal provisions,’ the report states.

Adds economist Acharya: “The government has failed in its responsibility to protect the wealth of the citizens. The government became helpless in refunding the savings of the public and taking action against the fraud even though the crime continued in the name of cooperatives.”

A former colleague of Acharya’s committed suicide after he did not receive the Rs5 million he saved in a cooperative. Even a former executive director of Nepal Rastra Bank has been cheated of Rs20 million he saved in a cooperative.

Although the 2013 probe commission found 162 cooperatives, including their branches, as problematic and recommended for property management, the government has declared only 12 as such. No action for management of property and liability has been taken against many cooperatives that have failed to refund the savers’ money and have disappeared.

Trilochan Pangeni, suggests that that the risk has increased due to the politicisation of the cooperatives. He argues that law has been deliberately weakened by people in power so that the cooperatives could be let free.

“While formulating the Cooperatives Act in 2017, a stern legal action against those committing irregularities in the cooperatives was proposed, but the political nexus derailed those provisions,” he added.

In 2016, Nepal Rastra Bank drafted a bill making fraud in cooperatives subject to punishment as banking offence. During discussions in the Parliament, the bill was taken to the Finance Committee which had cooperatives campaigner Keshav Badal, Civil Cooperatives chairperson Ichha Raj Tamang and other persons associated with cooperatives as members.

The conflict of interest in the Committee limited the definition of the cooperative organisation to include only the organisations licensed by Nepal Rastra Bank. As per this definition, the Act would incorporate only 15 cooperatives that had obtained permission from the central bank. As a result, the fraud committed in other cooperatives could not be brought to action for banking offences.

Says Tol Raj Upadhyay of the Department of Cooperatives: “The power to regulate the cooperatives could be developed at the local and provincial levels. Even the federation has only 20 staff. The long-standing deterioration that crept under the lack of institutional regulation has flourished now.”

Originally published by Centre for Investigative Journalism (CIJ).