I. The need for effective regulation for credit and other types of cooperatives with savings and credit services

a. Credit and other types of cooperatives with savings and credit services are engaged in financial intermediation;
b. Most of their members belong to the lower income segment of the population;
c. As such, it is important to ensure the safety and soundness of management operations and policy decisions affecting the liquidity and solvency of credit and other types of cooperatives with savings and credit services;
d. At present, there is no effective regulation for credit and other types of cooperatives with savings and credit services due to conflicting mandates of the designated regulatory authority: development and regulation. Hence, there is:

• Lack of focus in prioritizing activities and function
• Inadequate capability of human resources available
• Weak institutional infrastructure for effective regulation

There are pending proposed legislative amendments to the coop code and the charter of CDA that put emphasis on the regulation of credit and other types of cooperatives with savings and credit services.

II. Establishment of the necessary information infrastructure

a. Transparent, accurate and consistent set of information is important for effective regulation.

b. Initial steps

• Issuance of the circular mandating the adoption of the Standard Chart of Accounts (SCA) and the accompanying Accounting Manual.
• Issuance of the circular mandating the adoption of the Performance Standards (COOP-PESOS).
  

c. Current gaps

• No effective structure within CDA to enforce and monitor the adoption of the SCA and COOP-PESOS by concerned credit and other types of cooperatives with savings and credit services .
• Inadequate rules and regulations for effective supervision that should be uniformly applied to all credit and other types of cooperatives with savings and credit services.

III. Establishing the framework for regulation

a. What is regulation?

• Issuance of basic prudential rules and regulations for the safe and sound operation of credit and other types of cooperatives with savings and credit services (i.e., adherence to internationally accepted sound financial practices, good governance and management principles and risk management).
• Usually done by the state through its credit cooperative regulatory authority (in this case the CDA).

b. What is supervision?

• Process by which the designated supervisor determines if the credit cooperative is managed according to sound management practices and in compliance with the basic rules and regulation set by the state regulatory agency.
• Usually done by designated federations or associations of credit cooperatives.

c. The proposed framework for the regulation and supervision of credit and other types of cooperatives with savings and credit services:

• Basic Principles

» State authority is designated as the primary regulator for credit and other types of cooperatives with savings and credit services. As primary regulator it:

a. Issues basic rules, regulations and performance standards for credit and other types of cooperatives with savings and credit services.

b. Selects (through an approved accreditation criteria) , designates and deputizes a cooperative federation and/or union to supervise primary cooperatives.

c. Issues the basic guidelines for supervision . It also reserves the right to withdraw the deputized authority given to federation once it violates the approved guidelines for supervision.

d. Monitors the supervisor's compliance with established guidelines. It may conduct random inspection of primary credit cooperatives to validate supervision activities of the federation vis-à-vis its compliance with the state's authority's established norms.

e. Accredits external auditors and issues guidelines for audit.

f. Provides remedial measures in the operations of distressed primary credit cooperatives at the request of the deputized supervisor or when the deputized supervisor fails to perform its functions. In the case of the latter, the primary credit cooperative can go directly to the state regulator BUT the state regulator must first coordinate with the supervising federation before undertaking any remedial measures.

g. Supervises primary credit cooperatives that are not members of any accredited federation.

h. Requires the submission of relevant reports from the designated supervisor.

» Federations or unions of cooperatives , when deputized conduct the supervision and examination of credit cooperatives. As supervisor, it:

a. Creates a special board of supervisors within the federation. The special board is functionally independent of the BOD of the federation. It will be directly responsible for the supervision member credit cooperatives. The membership of the board of supervisors will be approved and confirmed by the State Authority

b. Issues additional standards for its member credit cooperatives in accordance with the general framework for regulation issued by the state regulator. Additional standards if any are submitted to the state regulator for approval to ensure that these do not conflict with the basic rules initially issued by the state.

c. Exercises both on-site and off-site supervisory powers (e.g., inspection, validation and verification)

d. Provides remedial assistance in the operations and management of the primary credit cooperative when it fails to perform as desired without violating the principle of autonomy and independence. It may provide comptrollership and receivership function upon the approval of the Board of Supervisors.

e. Transmits relevant and required information to the state authority.

f. Provides ancillary (e.g., liquidity assistance, guarantee support, deposit insurance) services to its member credit cooperatives.

• Rationale for the proposed model (delegated supervision)

  » More cost-efficient given the number of credit cooperatives in the country and the current resources of the CDA.
  
  » Consistent with the principle of subsidiarity.

• Extent and scope of regulation, supervision and examination

» Regulation, supervision and examination will only cover credit and other types of cooperatives with savings and credit services that have total paid-up capital of not lower than P500,000 or such amount as may be determined by the State authority.

» The state regulator will issue rules and regulations on the following areas:
a. Compliance to the SCA and its accompanying Accounting Manual
b. Adoption of the COOP-PESOS
c. Adoption of the Standard Audit System for Cooperatives (SASC)
d. Compliance to the Basle Agreement on prudential regulation (e.g. capital adequacy, reserve requirement, money laundering)
e. Liquidity and fund management
f. Governance (including fit and proper rule for board of directors and management)
g. Asset-liability management (e.g. DOSRI, single-borrowers limit)
h. Other guidelines and measures for the safe and sound conduct of operations of the credit cooperative that may be issued and deemed necessary by the state regulator

• Methodology for supervision

» Adoption of risk-based supervision for credit cooperatives

» Off-site analysis - primary credit cooperatives are required to regularly submit specific information for the supervisor to determine level of performance of the credit coop. Results of off-site analysis will be the basis for determining the need for on-site examination.

» On-site examination - only for primary credit cooperatives that are found to have problems in performance. This includes evaluation of policies and financial practices and the credit coop's internal control systems; verification of the reliability of financial statements and the credit coop's compliance with laws and regulations.

» Supervisor shall charge supervision and examination fee. This is usually levied as a certain percentage of the total resources of the credit cooperative being supervised. Higher fees will be imposed by the state regulator on non-affiliated credit coops to encourage coops to affiliate with secondary federations.

• What is the role of CDA and its regional offices
  
  

  » CDA main office
  
  a. To formulate and issue the appropriate measures and guidelines, and performance standards for the safe and sound conduct of operations of credit and other types of cooperatives with savings and credit services
  b. To select, designate and deputize supervisory federation/union based on approved accreditation criteria.
  c. To monitor/validate the performance of deputized supervisory federations/unions.
  d. To develop a complete supervision manual
  
  

  » Regional offices
  a. To conduct random monitoring of primary credit cooperatives in their respective area of operations.
  b. To supervise credit cooperatives that are not affiliated with any accredited supervisory federation/union.
  c. To submit regular reports to CDA main office
  

• Limitations and Gaps

» CDA
a. Limited authority to issue rules and regulations
b. Current structure is biased towards developmental activities
c. Lack of incentives for good performance.
d. Lack of review mechanism for current rules, regulations and guidelines to make them more responsive to changing environment
e. Lack of institutional capability to effectively regulate

» Cooperative federations and unions
a. No experience on supervision
b. Limited capacity to supervise
c. Bias on business services and developmental activities
d. Lack of incentives/value-added to primaries (selective, if there is any)
e. No feedback mechanism to and from primaries
f. Lack of improvement plan for coop affiliates
g. No authority to impose sanctions and exact accountability
h. Conflict of interest within the federation, in terms of supervision
i. Cooperative Movement's structural defects
j. Lack of financial resources
k. Federations' structures are not rationalized according to business functions
l. No standard operating policies for all federations
m. Weak governance
n. No guidelines for primary cooperatives to federate on the basis of its core activities

 

• Pre-requisite infrastructure and capability building needs under the proposed framework

» Complete and accurate registry of active credit and other types of cooperatives with credit services and federations (to include profile of credit cooperatives, information on asset size, management structure, etc.)

» CDA to establish a unit that will focus on effective regulation

»Expert to assist CDA in the following:
a. Drafting and formulation of relevant regulatory rules and regulations for credit and other types of cooperatives with credit services (e.g., loan delinquency) - with possible TA from BSP, PDIC and other relevant institutions.
b. Drafting and formulation of the supervision manual and the accreditation criteria for deputized supervisors
»Institutional review of CDA with specific focus on human resource requirement for effective regulation
a. Strengthen corporate governance of the Board of Administrators
b. Orientation on the adoption and implementation of effective regulatory environment for credit cooperatives for the CDA Board of Administrators
c. Re-tooling for Regional Directors and CDA specialists (specific training needs to be identified in the institutional review)
d. Strengthen the information and communication infrastructure with the cooperative sector

» Training on effective risk-based supervision, off-site analysis and on-site examination (to include federations/unions).

» Development of a software support for the implementation of effective regulation and supervision

» Institutional review of federations/unions for effective supervision
a. Strengthening corporate governance of cooperative federations/unions
b. Re-tooling of federation/union staff for effective supervision