Hardly a year goes by when one does not hear of scams in cooperative societies and banks in the country. They are in the news for not just playing with depositors’ money but also ‘managing’ thousands of crores of unaccounted money of unscrupulous politicians, away from the glare of the banking regulator and taxmen. And in this game some states are more notorious than others.
While cooperative banks in Kerala largely attract deposits from non-resident Keralites, many of whom use illicit channels to repatriate cash, those in states like Gujarat, Maharashtra, West Bengal and Andhra Pradesh get a significant portion of their deposits by way of unaccounted money of politicians and farm loans and subsidies generated in thousands of fake names. In fact, in the latter states, many of the cooperative banks are directly run by politicians.
These service cooperative banks generally manage the unaccounted money through benami fixed deposits by flouting Know Your Customer (KYC) norms. This is not to say that these cooperative banks service only the tax-evaders and politicians. A large number of farmers and small industrial workers in villages that do not have commercial banks depend on these cooperative bodies for their banking needs.
Since the 8 November demonetisation initiative, the functioning of these service cooperative banks has come to a virtual standstill. These banks have been literally paralysed after they were restricted from exchanging their stock of banned currencies, a significantly large portion of which is believed to be unaccounted.
The central government has barred service cooperative banks from not only exchanging old currencies but also depositing their excess cash into the district or state cooperative banks on the grounds that these primary cooperative credit societies do not have proper infrastructure as per banking regulations and that they do not follow the KYC rules.
While the state and district cooperative banks are apparently licensed by RBI, the primary cooperative societies are permitted under the provisions of the State Cooperative Societies Act and are currently overseen by the registrar of cooperative societies.
“Apart from the emerging ill-trust among the customers following the ‘black money’ tag on the banks, loan repayment as well as grants have also been severely affected in several of the branches as we are not allowed to receive old currency and there is no enough stock of new currency too,” a branch manager at one of the district cooperative banks in Kerala told BW Businessworld. According to him, the overdue loans at these banks have reached already at an alarming level.
Political parties in states, including Kerala, have already raised a big hue and cry over the government action. Besides, 14 district cooperative banks from Kerala have filed a review petition in the Supreme Court against the order. In Gujarat too, the panic-stricken cooperative sector, which has 18 district cooperative banks with more than a thousand branches, has approached the court for relief from the ban on old currency.
The petitioners argue that since state and district cooperative banks function under the Reserve Bank (RBI) mandate and follow proper KYC rules, it is unfair to ban their normal banking functions after the demonetisation. Appearing for district cooperative banks of Kerala, senior advocate Kapil Sibal has submitted in the Supreme Court a Nabard report that says the district cooperative banks of the state are following the KYC norms.
Lifeblood of Rural EconomyThe cooperative banking sector has had an important role to play in the rural credit delivery system. These banks were set up to meet the farmers’ credit requirements. Although commercial banks and new generation private banks have entered rural areas and opened large number of branches, the cooperative banks continue to be an important cog in the rural credit system.
Similarly, the cooperative credit societies at the ground level are also meant to cater to the credit requirements of members as well as provide other credit-linked services such as input supply, storage and marketing of produce, among others.
Cooperative banks came into existence in Kerala even before the formation of the state as part of a people’s movement to free farmers and poor workers from the clutches of moneylenders. The sector maintains a structure of state and district level banks with proper banking license, and there are primary cooperative credit societies, which are supposed to serve their members with financial assistance. The State Cooperative Bank in Kerala currently operates 20 branches and the 14 district cooperative banks have 716 branches across the state.
Besides, there are 46 primary cooperative agriculture and rural development banks with 166 branches and 1,638 primary agricultural credit societies located in rural areas. In most other states, including West Bengal, Maharashtra and Gujarat, the cooperative sector has a similar structure and presence in the rural economy.
Cooperative sector insiders admit that the rural cooperative banks might have, to a certain extent, become a refuge for people and organisations looking for less stringent procedures and scrutiny to park their funds for a short term, but they say a blanket ban is unwarranted.
“Although the service cooperative banks used to be a place only for rural poor and farmers earlier, the IT scrutiny of banking transactions at the commercial banks have now forced many from the cities including NRIs to look at these rural bodies to park their unaccounted money,” says a sector analyst.
Murali Sahadevan, a branch manager at a district cooperative banks in Kerala, blames the RBI for the mess in the service cooperative banks. “Most of these primary service cooperative banks had applied for a banking licence after meeting the criterion specified by RBI in the last couple of years. But their applications were rejected on grounds that they still fall under state control,” he says.
However, everyone agrees that there is no proper regulation. “We are supportive of the cooperative sector as a vehicle of financial inclusion. But their operations are not regulated,” says Gopal Agarwal, BJP’s national spokesperson on economic issues.
Success Or Failure? So has the ban on cooperative banks served its purpose? Not really, say cooperative bank insiders.
“Since the RBI failed to notify the new-generation private banks not to accept deposits from cooperative banks, even though there were limits and KYC requirements, a large chunk of money has already been deposited into several new accounts opened by primary service cooperative societies and banks at the new-gen banks,” says a cooperative banker, requesting anonymity.
“The new-generation banks were quite liberal in accepting deposits and they even started canvassing for deposits in exchange for new currencies,” he adds.
Now, if the move to clean up the ‘black money’ stashed in the cooperative banks has not yielded the desired results, it begs the question: Did demonetisation create an unnecessary fuss or does the country need stronger measures to clean up the economy?
BW Reporters
Unnikrishnan is currently Senior Associate Editor with BW Businessworld at its Mumbai Bureau. During his two decades long journalistic career, he has received several media awards and recognitions. His articles on healthcare, life sciences and intellectual property rights (IPR) have been republished by several international blogs and journals.