The Beed PACS That Wants to Pay Dividends and Waive Interest
Bhima Krishi Seva Sahakari Sanstha is a primary agricultural credit society in Beed district with 3,200 members, of whom 1,450 have borrowed. At the close of 2023-24 its outstanding advances were ₹6.4 crore against member deposits of ₹2.1 crore and borrowing of ₹4.2 crore from the district central co-operative bank. Overdues stood at ₹1.95 crore; ₹68 lakh of this had been outstanding for more than three years, largely crop loans from a taluka that has faced two deficient monsoons in succession. The statutory auditor classified the society in 'C' audit class for 2023-24. At the June board meeting the chairman proposes three things before the coming election: declare a 12% dividend on share capital, waive by board resolution all interest on overdues older than two years, and sanction a ₹15 lakh gold loan to a director's brother-in-law who is not a member. Eight of the thirteen board seats are filled. The district central co-operative bank has asked for a time-bound recovery plan.
1. Evaluate each of the chairman's three proposals and state what the board should do, giving reasons.
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1. Dividend of 12% - Dividend can be paid only out of genuine net profit, after the mandatory transfer to the reserve fund and after providing for overdue and doubtful debts. The society's overdues (₹1.95 crore) far exceed any usable profit, and a 'C' class audit means the Registrar's scrutiny applies to the year's accounts. Paying dividend now would drain the very funds needed for provisioning and would misrepresent the society's health to members. Reject.
2. Blanket interest waiver - A board cannot unilaterally write off interest; waiver or compromise of dues requires authority under the bye-laws and the general body, and in a society with borrowings usually the financing bank's consent. It also violates equity: members who repaid on time would subsidise defaulters, and the waiver would destroy repayment culture before the very election the chairman is worried about. Reject; instead offer a time-bound one-time settlement to genuinely distressed borrowers.
3. Gold loan to a non-member who is a director's relative - Membership is a precondition for credit, and the MCS Act and prudential norms restrict societies from lending to directors and their close relatives or firms in which they are interested, without disclosure and abstention by the interested director. The sanction is improper and would be personally actionable against the directors who voted for it. Reject.
Also note the board is functioning with 8 of 13 seats; vacancies must be filled through the bye-law procedure so that no later resolution is challenged for want of proper constitution.
2. The manager must place a recovery plan before the district central co-operative bank. Outline what it should contain and explain why each element matters.
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A recovery plan must convert a lump of overdues into dated cash flows, so build it around four layers:
- Age-wise bucketing and classification. Split ₹1.95 crore into standard (up to 90 days), sub-standard, doubtful and loss (the ₹68 lakh over three years is effectively loss). Classification decides provisioning, and provisioning decides whether any surplus exists at all.
- Provisioning and realistic balance sheet. Provide for doubtful and loss assets out of current income and reserves before showing any profit; this is the honest version of the 'no dividend' decision.
- Recovery instruments matched to the borrower type. For wilful defaulters: notice, then arbitration or a recovery certificate through the Registrar as arrears of land revenue. For distressed farmers: rescheduling over 3–4 crop cycles, linking fresh short-term credit to Kisan Credit Card limits, and cluster or joint-liability group lending with peer pressure. For chronic cases: a one-time settlement within a board-approved, general-body-ratified policy with a clear cut-off.
- Structural correction. Stop lending to the same defaulting borrowers, reduce dependence on the ₹4.2 crore bank borrowing by raising member share capital and deposits, and add supervisory checks so field staff report overdues monthly.
Why it matters to the DCCB: the bank is assessing the PACS as a borrower. Its willingness to lend next season depends on provisioning, recovery trend and board discipline, not on assurances. Add monthly review milestones so default is visible early.
3. A new applicant offers to deposit ₹50,000 and asks for a ₹3 lakh loan immediately, though he has never been a member. How should the society respond, and what membership safeguards apply?
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Refuse the package as presented, but do not refuse the person.
Membership first, credit later. Admission is governed by the bye-laws - ordinarily residence or land within the area of operation, an application, and board approval within the prescribed period. The ₹50,000 cannot be used to buy instant creditworthiness; share capital is a contribution to ownership, not a deposit that entitles a member to borrow. Accepting it as a quasi-deposit would also distort the society's deposit base and confuse share capital with deposits, which carry different redemption rules.
Credit follows appraisal, not membership. A ₹3 lakh loan needs an assessment of repayment capacity, existing borrowings, purpose and security. A first-time borrower with no track record should start at a lower limit, ideally a short-term crop or productive loan, and graduate after clean repayment.
Procedure and transparency. The board must pass the admission resolution on record, allot the share certificate, and then process the loan through the credit committee with the usual documents. Any director related to the applicant must disclose the relationship and abstain from both discussions.
Risk of skipping steps: hurried admission and lending to a single member is exactly how the ₹1.95 crore overdues arose; the society's recovery plan cannot afford another unappraised exposure.