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is the act of stripping a currency unit of its status as legal tender. It is
necessary whenever there is a change of national currency. The old unit of
currency must be retired and replaced with a new currency unit. In 2016, the
Indian government decided to demonetize the 500 and 1000 rupee notes, the two
biggest denomination notes. These notes accounted for 86% of the country’s cash
supply. The government’s goal was to eradicate counterfeit currency, fight tax
evasion, eliminate black money gotten from money laundering and terrorist
financing activities, and promote a cashless economy. By making the larger
denomination notes worthless, individuals and entities with huge sums of black
money gotten from parallel cash systems were forced to convert the money at a
bank which is by law required to acquire tax information from the entity.  The demonetization initiative caused a sudden
breakdown in India’s commercial ecosystem. Trade across all facets of the
economy was disrupted, and cash centric sectors like agriculture, fishing, and
the voluminous informal market were virtually shut down, with many businesses
and livelihoods going under completely – not to mention the economic impact of
millions of people standing in line for hours to exchange or deposit canceled
banknotes rather than working or doing business.  “The unbanked and informal economy is
hard hit,” explained Monishankar Prasad, the New Delhi-based author and
editor for Alochonaa, an Australian current events publication. “The poor
do not have the access to structural and cultural resources to adapt to shock
doctrine economics. The poor were taken totally off guard and the banking
infrastructure in the surroundings is rather limited. The tech class has poor
exposure to critical social theory in order to understand the impact on the

            There is an empathy
deficit.”  If there is any immediate
casualty to Prime Minister Narendra Modi’s demonetization exercise, announced
on 8 November, that could possibly be for the country’s cooperative banks, which
are struggling to stay afloat. Though inefficient, cooperative banks are still
critical for the last mile in rural India. This will continue for at least the
next 5 – 10 years till larger banks/payment banks/small finance banks take firm
hold in rural India.  Post
demonetization, the cooperative banking sector is gasping for breath on account
of a severe liquidity crisis. Soon after the demonetization announcement,
cooperative banks were asked not to accept the old Rs. 500, Rs 1,000 currency
note deposits or exchange those notes with the new currency notes. This meant
that these lenders could only deal with permissible denominations of Rs 100 and
below or takes deposits in new currencies that are hardly available in the
system.  This has effectively left many
smaller cooperative banks with a few thousand rupees of funds. “There is
practically no business in the bank for last two months or so. It is going to
be tough,” said an official with one of the primary cooperative banks , a state
where cooperative banks play a crucial role in taking the banking services to
the last mile.  Cooperative banks are
particularly important for farmers and lower income groups who want small
ticket loans in less time in relation to larger banks.

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Impact of Demonetization
on Cooperative Banking System

volume of rural credit in India is mainly for short term credit (one year) for
production of Kharif and Rabi crops and vegetables and medium term credit
(three to five years) for allied sectors such as wells, pump sets, dairy,
poultry, horticulture, plantation, etc. A small portion goes to
non-agricultural sector such as artisans and tiny business/services.

are three types of cooperative banks in India, state cooperative bank, urban
cooperative banks and district cooperative banks. Only DCBs were banned by RBI
after allegations of money laundering. But around 100 urban cooperatives banks
are also being probed by the ED. In the first three weeks after demonetization,
nearly Rs. 12,000 crore worth high-value cash deposits worth Rs. 80 lakh each
were made by 325 urban cooperative banks from remote districts, This is nearly
a 25-fold increase in cash balance of these urban cooperative banks compared to
their last balance on November 7.  The
government and Reserve Bank of India (RBI) are set to bring out tougher norms
for cooperative banks, which have come under scanner for alleged discrepancies
and irregularities in the wake of the demonetization drive. According to a
recent report by the income tax department, most banks have indulged in money
laundering after the central government announced ban on high-value bank notes
of Rs. 500 and Rs. 1,000 from November 8 midnight.  Many banks accepted and exchanged the old
currency notes at a premium and parked large deposits in multiple accounts, the
report added. Moreover, several accounts have been opened without following
Know Your-Customer norm, the report pointed out. A senior government official
said these banks could become conduits for black money in the future. At
present, the scrutiny and vigilance on these banks is not as stringent as that
on scheduled commercial banks. “These banks need to be monitored as carefully
as any other scheduled commercial banks have been used for a large number of
inappropriate activities in the past and these can be used for the same purpose
in the future,” the official, who did not wish to be identified.

Demonetization: Retaining
Credibility of Co-operative Banks:

 With move to demonetize Rs. 500 and Rs.1000
notes by the central government had a strange fall out when Cooperative Banks
which are the backbone of the rural economy, have been paralyzed with the ban
of accepting the old currency that are no long legal tender now.

 Operations at 370 district central cooperative
banks (DCCBs) and over 93,000 primary agricultural credit societies (PACS) have
been severely hit with the Reserve Bank of India (RBI) slapping restrictions following
the demonetization of Rs. 500 and Rs. 1,000 notes.

 In a direction to the banks, RBI says that
they have advised the Urban Cooperative Banks through its Regional Offices and
the State Cooperative Banks through National Bank for Agricultural and Rural Development
(NABARD) of the need to ensure strict compliance with the instructions issued
with regard to exchange of specified bank notes as also deposit of such notes
into the accounts of their customers. But there were reports that some cooperative
banks were not strictly adhering to the instructions issued in connection with
the withdrawal of legal tender status of the existing Rs. 500 and Rs. 1000 bank
notes (specified bank notes).  The
Reserve Bank of India’s restrictions drive during the demonetization for the
Cooperative Banks who have provided credit to farmers and three-tier banking system
is one of the largest in the country. Like the Railways, the Cooperative Banks
have also been described as the lifeline of the state’s economy and there had
been protests following the RBI decision and the cooperative sector went on
strike last week.  The government must
allow Cooperative Banks to function or farmers which have been their source of
funds for decades and have suddenly become invalid. Dr. Anand Rai Vyapamm scam
whistleblower has rightly pointed out that this step was taken because some cooperative
banks are dominated by politicians and were reportedly being used to launder
Rs. 500 and Rs. 1000 notes.

discrimination towards the Cooperative Banks will put the credibility of the
banks at stake. The RBI and the Central Government should have taken this into
consideration before meting out discriminatory treatment. The whole chaos will
takes away the trust of  common man from
cooperative banks. Customers will think twice again before depositing their
hard-earned money or taking a loan against their property from a local cooperative
bank. Due to uncertainty, the people will now be scared to park their money in
future in these banks due to uncertainty as their credibility has also taken a
hit. The current crisis could take the shape of a permanent mutilation if cash
crunch continues for a few months and it will take a long time for them to
recover. Instead, the government should have tried to strengthen the infrastructure
and capabilities of these banks instead of bringing them on the verge of

cooperatives play a major

            DCC banks in Maharashtra alone hold
nearly Rs 2,270 crore in such old notes. Many of the state cooperatives are
controlled by the NCP and the Shiv Sena has a sizeable presence in their
workers’ unions.

            There are in all 31 DCCBs, of which
Pune DCCB has the largest deposit of demonetised notes (Rs 811 crore), followed
by Satara DCCB (Rs 399 crore) and Nashik DCCB with Rs 365 crore. With their
money  DCCBs were finding it difficult to
raise money to extend crop loans for the upcoming agricultural season. They
were also struggling to meet the government’s directive to provide an advance
of Rs 10,000 to every farmer until the larger issue of loan waiver was

            Chief executive officer of Kolhapur
DCCB, MLA Hasan Mushrif, said, “It is a moral victory for the bank, which
has been sitting on Rs 279.78 crore in the form of old denomination notes and
incurring losses of Rs 15 lakh as interest on this deposit. The government has
not mentioned anything regarding compensation for the interest we have lost.
Besides, the note ban tainted our image among the rural masses and has affected
our deposit collection.”


             Cash crunch is the new norm for most people
after demonetization, and some of the worst impacted are customers of
co-operative financial institutes – banks and societies. One problem with the
structure of the cooperatives is that there are multiple regulators. The
control of the Reserve Bank of India (RBI) on state, district and urban
cooperative banks get diluted because of this. Also, cooperative banks and
societies chose their management through an election process. Given that
cooperative banks are largely controlled by politicians, investors also need to
be very careful about their banking practices. If the loans are granted very
easily, the deposits will be at risk. Customers should not get lured to banking
with a cooperative financial institution just because it does not insist on you
giving PAN number, or does not deduct TDS on interest, etc. If you are not
comfortable doing the due diligence, then it is best to avoid cooperative
banks. Even as things are on the mend, the problems – situational and
institutional – are still there. There is surely cause for concern, but experts
advise against any panic decisions. They insist that investors need to evaluate
whether or not they are banking with strong institutions. “Instead of avoiding
cooperative banks altogether, customers need to do stress on due diligence.

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