An omission most untimely and unfair

Disallowing rural cooperative banks from exchanging banned notes will have long-term consequences

CRISIS OF CREDIT

THE CENTRE’S demonetisation scheme announced on November 8 has all the elements of shock and surprise — or Tsunami, as economist Lord Meghnad Desai has called it. Among its stated objectives are cracking down on black money and counterfeit currency. The longer-term objective is to bring in a new financial order, by completely reordering the existing cash-based system that abets the parallel ‘black’ economy.

While the delivery vehicle for the new order is the banking sector — mainly scheduled commercialbankswith1.33lakhbranchesand 2.2 lakh ATMS, apart from the network of 1.55 lakh post offices — the surprising omission fromthisexerciseisthecooperativecreditsystem servicing the rural population.

Atpresent,thereareabout370districtcentralcooperativebanks(dccb)withover14,000 branches and over Rs 2,50,000 crore of deposits. One level below are the nearly 93,000 primary agricultural credit societies (PACS) with5croreborrowingmembers,annualloans and advances of Rs 1,60,000 crore, and Rs 85,000 crore of deposits. Maharashtra, Gujarat, Kerala, Tamil Nadu and Karnataka are amongthestateswithanestablishedandfunctional rural cooperative network.

It is surprising that despite such widespread rural presence, the Reserve Bank of India (RBI) has not allowed rural cooperatives to accept and exchange demonetised notes. Instead of treating them as banks participating in national duty, the doors of cooperatives have been closed to farmers, that too, just when the kharif crop has been harvested and moneyismostrequiredfortherabiseason.the apparent reason being given is that cooperative institutions may be used as avenues for depositing black money in high-value notes. The RBI’S action has dented the image of the cooperative banking sector in the eyes of the public,withlong-termnegativeconsequences.

Theruralcooperativecreditstructureworks onathree-tiersystem,withthepacsatthevillagelevel,thedccbsatthedistrictandanapex bank at the state level. The PACS provide crop loanstoenabletheirfarmer-membersfinance purchase of inputs (seed, fertiliser, pesticide, etc) and payment to labour for seasonal agriculturaloperations.tofundthese,theydepend mainly on loans raised from the DCCBS concerned based on their credit action plans. The DCCBS, in turn, borrow from the state cooperativebanks,whichalsoreceiverefinanceassistance from the National Bank for Agriculture and Rural Development (NABARD).

It is pertinent that the annual credit plans for agricultural finance are approved by NABARD. The operations of cooperative banks are subject to annual inspection and audit by NABARD, and also by the respective state cooperative departments for ensuring proper fund utilisation.

Theordinaryfarmerfeelscomfortableand welcome in any cooperative bank branch, whose employees are often from the same neighbourhood. The latter themselves identify with the farming community, unlike the commercialbankstaffthatarelargelyfromurban backgrounds. The ease of doing business —whetherforavailingloansordepositingcash withminimaldocumentationinasingleworking day — is what makes the cooperative network popular with rural customers.

The decision to exclude rural cooperative banks from the scheme of exchanging demonetised notes has created an unforeseen crisis. The initial few days after demonetisation — when there were no written instructions on DCCBS — witnessed a huge rush of customers depositing the specified withdrawn bank notes in the cooperatives. Before the restrictions were placed on November 14, DCCBS in Maharashtra alone had accepted around Rs 4,000 crore of such notes. The immediate problem today is the security and safety of the collected notes. Apart from insufficient space, the DCCBS are also faced with the burden of interest payments. But it’s even worse for farmers. Cooperatives banks have been dried off liquidity, even as demand for cash has peaked with the kharif crop being harvested and rabi sowing in full swing.

Themorelong-termimpacthastodowith trust and confidence in the cooperative banking system. Maharashtra has 31 DCCBS having 3,746branches,inadditionto21,000pacs.the DCCBS and PACS together with urban cooperative banks have deposits of some Rs 3,00,000 crore(seechart).thestoryisthesameforother stateslikegujaratandkerala,wherecommercial banks have hardly the spread in rural areas compared to that of cooperatives.

Cooperative Banks are licensed under Section 22 of Banking Regulation Act by RBI to carry on banking business in their areas of operation. Just as for commercial banks, regulatory controls are applicable to them as well — whetheritisknow-your-customer,capital-torisk-weighted assets ratio, monthly reporting requirements and inspection by NABARD, besides statutory audit by the state cooperative department. The banking regulator, therefore, can surely detect and initiate action in case of any irregularities. The case against the Maharashtra State Cooperative Bank in 2011 — extending to dissolving the board and appointing administrators to streamline its affairs — is an outstanding example.

Thepresentsituationcouldwellhavebeen avoided by insisting on Aadhaar verification. Instead of acknowledging their wide presence in rural areas and encouraging them to adopt technology and transparency, cooperative banksarebeingaccordedstep-motherlytreatment. By shutting down their doors and not putting in place credible alternative arrangements for making cash and credit available, farmers, especially with small and marginal holdings, will now be compelled to approach the moneylender. That would only further aggravate the farmer suicide phenomenon, in Maharashtra as well as other states.

(The writer is a serving IAS officer and former Secretary, Department of Cooperation, Maharashtra government. Views expressed are personal)