Saving in Cooperatives or Banks

People often confuse between Saving Cooperatives and banks when it comes saving their earnings. Unfortunately, there is no easy answer as both institutions have their own advantages and limitations. In general, cooperatives are member-based micro finance institutions with limited banking activities. They generally provide higher interest rates in the saving deposit as compared to banks, which is the main attraction for us to select them for depositing our savings.

Even though, cooperatives operating in different areas of the country are contributing significantly to improve people’s access to finance, we need to be careful while selecting them for our savings. As opposed to banks and financial institutions which are regulated by Nepal Rastra Bank, the cooperative sector has not been regulated properly, leaving depositors at risk. Despite more cooperatives running into crisis due to haphazard lending and bad corporate governance, the Department of Cooperative (DoC) has not been able to take action against many of the wrongdoers. Some of the examples are: Guna and Oriental. This has left the depositors at these institutions at receiving end as they are not able to get back their deposits even after the maturity of their fixed deposits. Therefore, it is not the questions of higher interest rates of the deposit, it is the question of where they use the depositor’s money for lending. Most cooperatives that were in crisis were due to their haphazard lending and bad corporate governance. In the past, the loans were often taken for real estate projects promoted by realty traders which pushed cooperatives into crisis. Unfortunately, as opposed to Nepal Rastra Bank, the Department of Cooperatives has not been able to effectively monitor and supervise the activities and the functions of the cooperatives due to lack of human resources. As per the report from the Department of Cooperatives (2074), there are 17,949 saving and multipurpose cooperatives in the country. Therefore, it is not possible for the Department to monitor them with the existing resources. As a result, the opportunity to resolve the issues or problems that  could have been resolved with some enforcement directives, if only they had been identified early, is largely missing. 

We also need to understand that banks are also not fully immune to risks. In the past, we have seen that the management of some banks were taken over by Nepal Rastra Bank due to their failure and potential risk to the financial system. The main differences between banks and cooperatives are how banks are regulated and their legal status as public companies.  Therefore, it is not only Nepal Rastra Bank that regulates the banks, but being public limited companies, they are also subject to regulation from Security Exchange Board of Nepal and Nepal Stock Exchange. In addition, banks are listed companies and hence are subject to the greater scrutiny from investors and analysts in addition to regulators. 

However, there are lots of saving cooperatives that are doing exemplary works in terms of mobilizing resources and offering good governance. Few frauds in the saving and credit cooperatives should not be linked with the whole cooperatives sector. 

Way forward
We are all concerned about our savings when we select any institution for their deposit. It is extremely difficult for anyone to give preference to one institution for another. Generally, we require taking a membership from a cooperative for loan and deposit. If we want to take a membership and deposit our savings in cooperatives, we need to make sure that are know their past performance and management quality. If possible, go through their annual reports. We need to understand their area of investment/lending. Is it concentrated on only one particular sector (i.e. real estate) or fairly diversified? The risk is generally low if the lending sector is more diversified.  Just like banks and financial institutions are required to Know Their Customers and we need to fill the form Know Your Customer, make sure that you tooKnow Your Institutionbefore deciding on one for deposit and membership. If there are instances of frequent changes of key management personnel, then there can be an issue of good governance. It is a good idea to avoid these kinds of institutions. If you are satisfied with the performance and the quality of the management, there is nothing wrong in selecting that cooperative for your deposit. If you opt to deposit your savings in cooperatives, it is a good idea to not put all your savings in one financial institution. To minimize the risk, make sure that you deposit your savings in at least two to three financial institutions including banks.