Credit Risk Management in Nepalese Cooperative Societies

Credit risk management has been always a prime concern for different stakeholders since it is the most critical of all risks faced by depository institutions (DIs). Since regulatory prerequisite imposed to cooperative society (CS) is not standard as imposed to banks by the central bank, a number of risks have been observed in this sector. Along with the horizontal and vertical growth of cooperatives, it diluted the ethical practices and resulted in issues such as adverse selection problems, lack of transparency, and poor governance system. This study has comprehended the analysis of credit risk and credit risk management of Nepalese cooperative societies using quantitative and qualitative tools. The primary survey has been conducted from July to September 2014, and secondary data are collected from the annual audit report for the five years period from 2008/09 to 2012/13 by a sampling of 126 cooperatives from the Kathmandu district. Internal management of cooperatives seems to be prompt in some cases, but it seems to be unfair in some other cases. A strong and prompt regulation should be imposed to eliminate such unfair practices. Credit risk management of cooperative societies does not seem to be satisfactory so, concerned authorities should select an appropriate credit risk management system and cooperative societies management should also give emphasis on credit risk management and its practical implementation. Risk variables are significantly associated with financial performance, efficiency, and organizational factors. CVR of long-term solvency risk and credit default risk are 32.50 % and 26.3% respectively and indicate the level of sensitiveness of those variables during the day-to-day operation of cooperative societies to manage credit risk. A huge discrepancy in the sizes of activities of the cooperative societies suggested that a unanimous regulatory provision may not be effective therefore cooperative societies should be categorized on different bases such as size, the area covered, activities, etc. and the regulation should be imposed accordingly