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Demonetizationis the act of stripping a currency unit of its status as legal tender. It isnecessary whenever there is a change of national currency. The old unit ofcurrency must be retired and replaced with a new currency unit. In 2016, theIndian government decided to demonetize the 500 and 1000 rupee notes, the twobiggest denomination notes. These notes accounted for 86% of the country’s cashsupply. The government’s goal was to eradicate counterfeit currency, fight taxevasion, eliminate black money gotten from money laundering and terroristfinancing activities, and promote a cashless economy.

By making the largerdenomination notes worthless, individuals and entities with huge sums of blackmoney gotten from parallel cash systems were forced to convert the money at abank which is by law required to acquire tax information from the entity.  The demonetization initiative caused a suddenbreakdown in India’s commercial ecosystem. Trade across all facets of theeconomy was disrupted, and cash centric sectors like agriculture, fishing, andthe voluminous informal market were virtually shut down, with many businessesand livelihoods going under completely – not to mention the economic impact ofmillions of people standing in line for hours to exchange or deposit canceledbanknotes rather than working or doing business.  “The unbanked and informal economy ishard hit,” explained Monishankar Prasad, the New Delhi-based author andeditor for Alochonaa, an Australian current events publication. “The poordo not have the access to structural and cultural resources to adapt to shockdoctrine economics.

The poor were taken totally off guard and the bankinginfrastructure in the surroundings is rather limited. The tech class has poorexposure to critical social theory in order to understand the impact on theground.             There is an empathydeficit.”  If there is any immediatecasualty to Prime Minister Narendra Modi’s demonetization exercise, announcedon 8 November, that could possibly be for the country’s cooperative banks, whichare struggling to stay afloat. Though inefficient, cooperative banks are stillcritical for the last mile in rural India. This will continue for at least thenext 5 – 10 years till larger banks/payment banks/small finance banks take firmhold in rural India.  Postdemonetization, the cooperative banking sector is gasping for breath on accountof a severe liquidity crisis.

Soon after the demonetization announcement,cooperative banks were asked not to accept the old Rs. 500, Rs 1,000 currencynote deposits or exchange those notes with the new currency notes. This meantthat these lenders could only deal with permissible denominations of Rs 100 andbelow or takes deposits in new currencies that are hardly available in thesystem.

  This has effectively left manysmaller cooperative banks with a few thousand rupees of funds. “There ispractically no business in the bank for last two months or so. It is going tobe tough,” said an official with one of the primary cooperative banks , a statewhere cooperative banks play a crucial role in taking the banking services tothe last mile.

  Cooperative banks areparticularly important for farmers and lower income groups who want smallticket loans in less time in relation to larger banks. Impact of Demonetizationon Cooperative Banking System             Thevolume of rural credit in India is mainly for short term credit (one year) forproduction 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 tonon-agricultural sector such as artisans and tiny business/services.                 Thereare three types of cooperative banks in India, state cooperative bank, urbancooperative banks and district cooperative banks. Only DCBs were banned by RBIafter allegations of money laundering. But around 100 urban cooperatives banksare 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 eachwere made by 325 urban cooperative banks from remote districts, This is nearlya 25-fold increase in cash balance of these urban cooperative banks compared totheir last balance on November 7.  Thegovernment and Reserve Bank of India (RBI) are set to bring out tougher normsfor cooperative banks, which have come under scanner for alleged discrepanciesand irregularities in the wake of the demonetization drive. According to arecent report by the income tax department, most banks have indulged in moneylaundering after the central government announced ban on high-value bank notesof Rs.

500 and Rs. 1,000 from November 8 midnight.  Many banks accepted and exchanged the oldcurrency notes at a premium and parked large deposits in multiple accounts, thereport added. Moreover, several accounts have been opened without followingKnow Your-Customer norm, the report pointed out.

A senior government officialsaid these banks could become conduits for black money in the future. Atpresent, the scrutiny and vigilance on these banks is not as stringent as thaton scheduled commercial banks. “These banks need to be monitored as carefullyas any other scheduled commercial banks have been used for a large number ofinappropriate activities in the past and these can be used for the same purposein the future,” the official, who did not wish to be identified.Demonetization: RetainingCredibility of Co-operative Banks:  With move to demonetize Rs.

500 and Rs.1000notes by the central government had a strange fall out when Cooperative Bankswhich are the backbone of the rural economy, have been paralyzed with the banof accepting the old currency that are no long legal tender now.  Operations at 370 district central cooperativebanks (DCCBs) and over 93,000 primary agricultural credit societies (PACS) havebeen severely hit with the Reserve Bank of India (RBI) slapping restrictions followingthe demonetization of Rs. 500 and Rs. 1,000 notes.  In a direction to the banks, RBI says thatthey have advised the Urban Cooperative Banks through its Regional Offices andthe State Cooperative Banks through National Bank for Agricultural and Rural Development(NABARD) of the need to ensure strict compliance with the instructions issuedwith regard to exchange of specified bank notes as also deposit of such notesinto the accounts of their customers. But there were reports that some cooperativebanks were not strictly adhering to the instructions issued in connection withthe withdrawal of legal tender status of the existing Rs. 500 and Rs.

1000 banknotes (specified bank notes).  TheReserve Bank of India’s restrictions drive during the demonetization for theCooperative Banks who have provided credit to farmers and three-tier banking systemis one of the largest in the country. Like the Railways, the Cooperative Bankshave also been described as the lifeline of the state’s economy and there hadbeen protests following the RBI decision and the cooperative sector went onstrike last week.  The government mustallow Cooperative Banks to function or farmers which have been their source offunds for decades and have suddenly become invalid. Dr. Anand Rai Vyapamm scamwhistleblower has rightly pointed out that this step was taken because some cooperativebanks are dominated by politicians and were reportedly being used to launderRs. 500 and Rs.

1000 notes.             Thediscrimination towards the Cooperative Banks will put the credibility of thebanks at stake. The RBI and the Central Government should have taken this intoconsideration before meting out discriminatory treatment. The whole chaos willtakes away the trust of  common man fromcooperative banks. Customers will think twice again before depositing theirhard-earned money or taking a loan against their property from a local cooperativebank. Due to uncertainty, the people will now be scared to park their money infuture in these banks due to uncertainty as their credibility has also taken ahit.

The current crisis could take the shape of a permanent mutilation if cashcrunch continues for a few months and it will take a long time for them torecover. Instead, the government should have tried to strengthen the infrastructureand capabilities of these banks instead of bringing them on the verge ofcollapse.cooperatives play a majorrole.            DCC banks in Maharashtra alone holdnearly Rs 2,270 crore in such old notes.

Many of the state cooperatives arecontrolled by the NCP and the Shiv Sena has a sizeable presence in theirworkers’ unions.            There are in all 31 DCCBs, of whichPune DCCB has the largest deposit of demonetised notes (Rs 811 crore), followedby Satara DCCB (Rs 399 crore) and Nashik DCCB with Rs 365 crore. With theirmoney  DCCBs were finding it difficult toraise money to extend crop loans for the upcoming agricultural season. Theywere also struggling to meet the government’s directive to provide an advanceof Rs 10,000 to every farmer until the larger issue of loan waiver wasformalized.            Chief executive officer of KolhapurDCCB, MLA Hasan Mushrif, said, “It is a moral victory for the bank, whichhas been sitting on Rs 279.78 crore in the form of old denomination notes andincurring losses of Rs 15 lakh as interest on this deposit. The government hasnot mentioned anything regarding compensation for the interest we have lost.

Besides, the note ban tainted our image among the rural masses and has affectedour deposit collection.”CONCLUSION              Cash crunch is the new norm for most peopleafter demonetization, and some of the worst impacted are customers ofco-operative financial institutes – banks and societies. One problem with thestructure of the cooperatives is that there are multiple regulators. Thecontrol of the Reserve Bank of India (RBI) on state, district and urbancooperative banks get diluted because of this. Also, cooperative banks andsocieties chose their management through an election process. Given thatcooperative banks are largely controlled by politicians, investors also need tobe very careful about their banking practices. If the loans are granted veryeasily, the deposits will be at risk. Customers should not get lured to bankingwith a cooperative financial institution just because it does not insist on yougiving PAN number, or does not deduct TDS on interest, etc.

If you are notcomfortable doing the due diligence, then it is best to avoid cooperativebanks. Even as things are on the mend, the problems – situational andinstitutional – are still there. There is surely cause for concern, but expertsadvise against any panic decisions. They insist that investors need to evaluatewhether or not they are banking with strong institutions. “Instead of avoidingcooperative banks altogether, customers need to do stress on due diligence.

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