Can Kerala’s co-operative banking system survive the demonetisation crisis?
The Reserve Bank of India’s restrictions have literally paralysed the system, which has a customer base of more than 10 million.india Updated: Nov 22, 2016 18:27 IST
Jayaram, a daily wage labourer from Mankave in Kozhikode district, needs a loan of Rs 2 lakh for his daughter’s wedding, scheduled for November 27. He approached the Calicut City Service Co-operative Bank (CCSCB), one of the largest primary co-operative banks that runs 24 branches across Kozhikode Corporation with over Rs 1,000 crore in deposits. The loan was approved, but the bank doesn’t have money to disburse it.
“I may have to postpone the wedding. I don’t know why the Union government is targeting co-operative banks. Those sitting in Delhi will not understand the problems of common people,” said an agitated Jayaram.
Sasi Mohan, secretary of the bank where Jayaram holds his account, said he is going through a difficult phase himself. “All our customers are in distress. They have postponed medical surgeries, marriages and house constructions. They cry while explaining their problems. Two days ago, a woman agriculture labourer pleaded with me to sanction Rs 6,000 for her husband’s medical emergency. I couldn’t do it. I haven’t slept peacefully for the last one week.”
Joshy Joseph from Poothady Panchayath in Wayanad district stalled the construction of his fish farm on Friday. “I didn’t get the loan amount of Rs 1 lakh from the co-operative bank. The construction work was stopped three days ago as I do not have money to pay the labourers,” said the 45-year-old farmer.
Jayaram and Joshy are among the millions of Keralites who have been hit hard by the Union government’s demonetisation decision, which includes not allowing these banks to receive old notes or issue new currency.
Backbone of the rural system
Co-operative banks in Kerala enjoy a rich legacy; they provided credit for farmers since the 1950s and 1960s, years before commercial banks found a foothold in the state. With a customer base of more than two million, the three-tier banking system is one of the largest in the country. It has 20 state co-operative banks, 784 district co-operative banks and 1,611 primary co-operative banks under its umbrella. The primary banks have more than 2,500 branches. The state and district banks follow the Reserve Bank of India (RBI)’s guidelines, while the primary banks come under the district banks and follow the directives of the Registrar of cooperative societies. Primary cooperative banks deposit money with the RBI-monitored district banks.
Little wonder, then, that Kerala finance minister, TM Thomas Issac, described co-operative banks as the lifeline of Kerala’s economy. “The financial institution has Rs 90,000 crore in deposits and Rs 75,000 crore in credits. The deposit-credit ratio is 80%, much higher than Kerala’s largest nationalised bank, State Bank of Travancore, which is at just 52.6%. The figures speak volumes about the importance of co-operative banks,” Issac wrote in an editorial in the Malayalam daily, Mathrubhumi, on November 18.
A deepening crisis amid transparency Issues
The crisis began almost a week after Prime Minister Narendra Modi’s surprise announcement that made 1000 and 500 rupee banknotes illegal tender. On November 14, the RBI stopped primary co-operative banks and district co-operative banks from accepting and exchanging the demonetised banknotes.In the interim period that had passed, between November 9 and 14, Rs 280 crore worth of old notes had been collected as deposits from account holders, though banks did not give out new notes.
It is believed that money-laundering suspicions forced the RBI to impose curbs on these financial transactions. The apex bank has not given any specific reasons for the decision so far, but its order paralysed the primary co-operatives. While the district banks are issuing new currency, primary banks can now neither accept scrapped notes nor issue new ones. They just have to do a balancing act with a meagre amount of Rs 24,000, provided by the district banks every week.
Predictably, Kerala has witnessed plenty of protests following the RBI’s decision. The co-operative sector went on strike on Wednesday. Chief minister Pinarayi Vijayan requested Union finance minister Arun Jaitley to lift the sanctions. Parliament members from the state, cutting across party lines, met Jaitley with the same demand.
CP John, former planning commission member, alleged that the union government aimed to discredit co-operative banks after demonetisation. “The Centre gave money transaction nod to post offices and petrol bunks, and not the co-operative banks. It is part of a conspiracy to provide ideal fodder for new-generation banks to widen their presence in Kerala.”
At the core of the current crisis lies the issue of transparency. It is alleged that primary co-operatives do not follow the KYC (Know Your Customer) process, thus making it easy to stash black money in benami accounts, i.e., accounts whose beneficiary is not the account holder on record. Successive state governments have objected to the RBI’s attempt to bring primary co-operatives under its ambit and make the system more transparent.
The banks, too,have resisted the move, arguing that the apex bank’s regulations would stop them from participating in social service activities like running fair price shops, Neethi medical stores and dialysis centres.
A task force set up for the revival of rural co-operatives in 2004, chaired by A Vaidyanathan, Emeritus Professor at Madras Institute of Development Studies, had suggested that “State governments need to make legislative amendments to enable the RBI to exercise its regulatory powers under the Banking Regulation Act directly, and not through the Registrar of Cooperative Societies (RCS), if the cooperative banks are to be regulated effectively”. It further noted: “The state governments should enter into an appropriate memorandum of understanding (MoU), agreeing to desist from interfering directly or indirectly in the management of the finances of these banks”.
Successive state governments have brushed these recommendations under the carpet and never acted on them.
Political controversies and the road ahead
The issue has taken a political turn with BJP state general secretary, K Surendran, alleging that the ruling Communist Party of India (Marxist) and the principal opposition Congress party stashed illegal money in cooperative banks, and this is why they are afraid of RBI intervention.
In a letter to Jaitley, he said that close to Rs 30,000 crore of black money had been deposited in cooperative banks in the state without paying income tax. “The depositors include politicians, real estate mafias, hawala dealers and terrorists. It will be for the benefit of the country if these deposits are verified and necessary action is taken,” he wrote.
Chief minister Pinarayi Vijayanhas hit back, accusing the BJP of wanting to destroy the cooperative banking sector in Kerala. “The decision to impose restrictions on co-operative banks is a political conspiracy hatched by BJP leaders in Kerala,” he said at a press conference in Thiruvananthapuram on Thursday. “Cooperative banks function under laws passed by the Kerala Legislative Assembly. The income tax department can conduct inquiries if they find fault with the cooperatives.”
The state also witnessed an unprecedented protest on November 18 when the Chief Minister and his Cabinet colleagues staged a dharna in front of the RBI regional office in Thiruvananthapuram.
The agitation is expected to strengthen in the coming days with the Congress deciding to support the government agitations against the centre’s move. Interestingly, most of the co-operatives are either controlled by CPI(M) or the Congress, while the BJP’s presence in the sector is quite negligible. CPI(M) and Congress candidates regularly win the elections for the president, secretary and board members of the co-operative banks.
With the Centre adopting a tough stand on unaccounted black money, observers believe that the primary co-operative banks have to fall in line and commit themselves to follow RBI guidelines, if they wish to resume banking services.
Economists also think that the co-operative system should be cleaned of black money. Dr BA Prakash, chairman of the fifth Kerala State Finance Commission, said that allegations of stashing black money in co-operative banks should be examined. “Co-operative societies should be protected at any cost. So the government should make it black-money free.”
(Published in arrangement with GRIST Media)