Credit cooperatives were institutionalized in India in the beginning of the twentieth century to help the rural peasantry meet its genuine credit requirements by promoting member driven and self governed institutions. In the initial design, it was conceived that ‘peer pressure’ which the members bring on each other rather than the ‘material wealth’ of the members, is key to the success of cooperatives. In the post independence period, Government viewed cooperatives as an instrument of rural development. Hence, government partnership in cooperatives was started to encourage and promote cooperatives in a big way in the mid 1950s. Though credit cooperatives made impressive gains subsequently in terms of their rural outreach and coverage of small and marginal farmers, their financial health has been an area of concern. The study is an attempt to enquire into the factors which impact financial health of cooperatives reflected through their recovery performance. The study uses state level data covering more than a hundred thousand Primary Agricultural Credit Societies (PACS) for the period 1997 to 2005. A host of indicators are considered to decipher the influence of ‘government’s association’, ‘peer pressure’, ‘sources of funds’ and ‘business mix’ on their recovery performance. Both government’s involvement in share capital and weakening peer pressure captured through the increasing average membership size is found to have a adverse effect on the recovery performance. It is also found that borrowings as a source of funds vis-a-vis the deposits is more effective from the recovery point of view. The empirical findings suggest that government should allow the cooperatives to evolve in a natural manner rather than through initial official encouragement and subsequent intervention. Government’s contribution to share capital of cooperatives should be stopped. There is also a need to revisit the issue of appropriate member size for a base level PACS so that cooperative principles are internalized amongst members and peer pressure works. Very large cooperatives should be avoided both in principle and practice.