National Cooperative Regulatory Authority begins operations, raising questions on depositor refunds

KATHMANDU: As the newly established National Cooperative Regulatory Authority formally begins its operations, questions are being raised about when depositors of troubled cooperatives will receive their stuck funds.

In December 2023 (Poush 2080), the Nepal government issued an ordinance aimed at regulating savings and credit cooperatives and ensuring the return of depositors’ lost funds. Under this ordinance, until the appointment of a permanent chairperson, the government has assigned Arjun Prasad Pokharel, Secretary at the Ministry of Land Management, Cooperatives, and Poverty Alleviation, as the interim chairperson of the authority. Following this, the regulatory authority’s office was officially inaugurated last Monday, with Secretary Pokharel assuming his new role.

Formation of the Board and Regulatory Structure

As per the ordinance, the governing board of the National Cooperative Regulatory Authority must include:

The Executive Director of Nepal Rastra Bank (NRB) (ex-officio director), and

The Joint Secretary of the Ministry of Cooperatives (ex-officio director).

Accordingly, Pokharel, NRB Executive Director Guru Prasad Paudel, and Joint Secretary Madan Koirala took their oath of office and secrecy on Monday.

Chairperson Pokharel expressed confidence in executing his new responsibilities effectively, stating, “For two decades, there has been discussion on the need for a secondary regulator for cooperatives. This authority is a fully autonomous regulatory body, designed to be as strong and powerful as Nepal Rastra Bank.”

With the establishment of the office, the authority is now set to begin operations. Meanwhile, the government will proceed with the appointment process for a permanent chairperson, expert members, and a chartered accountant for the authority.

No Clarity on Depositor Refunds Despite Legal Provisions

The ordinance issued on December 25, 2023 (Poush 10, 2080) provides for the formation of a strong regulatory authority to oversee savings and credit cooperatives. However, despite legal provisions for deposit refunds, there is still no clear timeline for when affected depositors will receive their funds.

Two major issues remain unresolved:

The government has not yet collected data on depositors with up to NPR 500,000 in savings.
The authority’s full operational setup is still uncertain.
Although the government had announced in its current fiscal year’s budget a commitment to refund depositors, no budget has been allocated for this purpose, nor has there been any discussion on securing alternative funding sources. Experts warn that uncertainty remains over how and when depositors will be repaid.

Special Arrangements for Depositor Protection

The ordinance states:
“Regardless of any conflicting provisions in existing laws, members of cooperatives—especially those declared ‘troubled’ under Clause 104—shall have their deposits of up to NPR 500,000 prioritized for repayment.”

For deposit amounts exceeding NPR 500,000, if a cooperative cannot make full repayments at once, a structured repayment plan will be implemented. The authority has been granted power to sell off assets or collateral pledged by cooperatives to repay depositors.

Collateral and Asset Liquidation for Refunds

Before selling collateral, cooperatives must first provide borrowers time to settle their dues. If borrowers fail to repay within the given timeframe, their collateral will be auctioned.

If the auctioned asset sells for a higher value than the loan amount, the remaining balance must be returned to the borrower. Furthermore, any rental income from cooperative-owned assets (houses, land, machinery, or equipment) must be used exclusively for deposit refunds.

Addressing Frozen Assets and Legal Complications

Many troubled cooperatives have assets or collateral frozen due to ongoing court cases or legal issues. If such assets can be liquidated to repay depositors, the management committee (as per Clause 105 of the Cooperative Act) has the right to request the release of frozen assets from the relevant courts or authorities.

If no legal hurdles remain, the court or authority must lift the freeze, allowing liquidation for deposit refunds.

Time-Bound Action Plan for Refunds
The authority must prepare a structured repayment framework with a clear timeline for returning depositors’ funds.

The ordinance also states:

All costs incurred in managing the assets of troubled cooperatives must be covered by the cooperative’s own assets.
After the government publishes a notice on deposit refunds, all cooperative members, depositors, lenders, and investors must submit their claims for recovery.

Formation of a Savings Refund Committee
If a cooperative fails to return depositors’ funds, and if:

The board of directors is absent, or
The board acts against depositors’ interests, or
The general assembly does not function,
at least 15% of the cooperative’s members can apply to form a Savings Refund Committee to recover deposits by taking control of the cooperative’s assets.

This committee will:

Recover funds from borrowers,
Liquidate assets, and
Maintain detailed records of all repayments.

Additionally, any funds recovered must be deposited in a separate bank account under Category ‘A’ commercial banks and used exclusively for deposit refunds. The cooperative must also submit financial reports to the regulatory authority every three months.

With these provisions, the new authority aims to regulate troubled cooperatives, but questions remain over the timeline and effectiveness of deposit refunds for affected members.