Effectiveness of Internal Control System and its Impact on the Efficiency of Primary Agricultural Credit Societies in Kerala

Abstract

Frauds are reported in banks very often and its cost and complexity also increased manifold. In the financial year 2019-20, the Indian banking sector lost and#8377; 1,85,644 crores in 8,707 fraudulent practices (Reserve Bank of India, 2020). As per the Reserve Bank of India reports, poor internal control system is a major cause for fraudulent activities. According to Basel Committee (1998), the system of internal control can ensure banks to comply with the rules and regulations, achieve its targets, mitigate risk and maintain proper reporting. Many of the problems that led to significant losses in financial institutions could have been prevented by a sound internal control system. An effective internal control system can ensure prudent operation of banking institutions and thereby promote stability in the entire financial system. The Committee recommended all banking institutions to have an effective internal control system regardless of its size. In India, the statistics show that financial cooperatives are more prone to fraudulent practices and failures than commercial banks. When no scheduled commercial banks were liquidated during the last two decades, cooperative banks get failed more often. The failures are even more prominent among primary agricultural credit cooperatives, but will not even get an exact statistic because they do not register with DICGC. As per National Federation of State Cooperative Banks Ltd (NAFSCOB), out of 95,995 Primary Agricultural Credit Societies (PACSs) in India, only 65,691 are viable as on 31st March 2019. Financial cooperatives are considered as a means for reaching out to the rural and semi-rural population in India and bringing them to the formal banking system (RBI, 2009). Primary Cooperative Societies in Kerala state are considerably better positioned and have the largest average membership size (16,313) among other Indian states (NAFSCOB, 2019). According to Nilsson (2018) members cannot collectively govern in large cooperatives and this will result in more managerial discretion.