If there is any immediate casualty to Prime Minister Narendra Modi’s demonetisation exercise, announced on 8 November, that could possibly be for the country’s cooperative banks, which are struggling to stay afloat. Besides damaging the health of this sector, PM Modi also risks losing political goodwill if he chooses to let these institutions die as they primarily deal with people at the bottom of the pyramid.
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 demonetisation, 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 take 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 one week or so. It is going to be tough,” said an official with one of the primary cooperative banks in Kerala, 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. The banking correspondents (BCs) system hasn't worked well so far though. Banking correspondents are agents of banks who operate in areas where there are no bank branches. The BCs collect deposits and offer loan products on behalf of the banks.
According to data from Nabard, there are 32 state cooperative banks, 370 district central cooperative banks as on 31 March 2015. The number of primary agricultural credit societies (PACS), the smaller ones, as on 31 March 2014, stood at 93042, as per the latest data available.
Why cooperative banks were restricted?
There are a couple of reasons why the government and the Reserve Bank of India (RBI) did not allow cooperative banks to accept or exchange old notes for the new currency.
First, the checks and balances at these banks aren’t perceived to be strong enough to counter efforts to push black money into the banking system. Staffers, too, aren’t trained well. These banks aren’t as tightly regulated as scheduled commercial banks. Most of these banks are indirectly controlled by politicians or local businessmen. Hence, there is, of course, reason to worry to let these banks participate in such a massive exercise.
But, by choking funds to cooperative banks and prolonging the crisis (it has already been more than 10 days), can inflict significant damage to the health of several cooperative banks, which are already on the verge of closure. The tiny ones are more vulnerable.
Why cooperative banks should matter to us?
Cooperative banks have been the trusted centres to bank for millions of farmers and middle, low-income people for long. Despite all their negative sides, these institutions are known to offer them easier loan and deposit products and hence is the favourite institution for the poor. Restricting them to conduct business, as happened post-demonetization, will have major impacts on these banks: It damages the business of cooperative banks and their financial health.
The cooperative sector has largely been a failure on account of the accumulated losses, etc, but that situation is beginning to change after an overhaul initiated by the RBI and NABARD in 2010. Many inefficient corrupt banks have been shut and the remaining are good enough to continue.
Consider this: State cooperative banks across the country have deposits to the tune of Rs 1,02859 crore as on 31 March 2015 as against Rs 1,04369 crore as on 31 March 2014. They have a total loan outstanding of Rs 1,14545 crore as on 31 March 2015 with an impressive loan recovery percentage almost 95 percent.
On the profitability front too, the sector has done relatively well, of late. Of the total, 29 state cooperative banks posted total profit of Rs 1,105 crore during 2014-15 as against Rs 926 crore by 27 state cooperative banks during 2013-14. Their NPAs stood at 5.02 percent of their total loans and advances outstanding as on 31 March 2015 as compared to 5.53 percent as on 31 March 2014.
In absolute terms, their NPAs stood at Rs 5,746 crore during 2014-15 as against Rs5699 crore during 2013-14. Also, these banks’ accumulated losses decreased to Rs 617 crore as on 31 March 2015 from Rs 696 crore as on 31 March 2014.
Similarly, primary agriculture credit societies (PACS) too have an impressive record of deposit-lending operations, at least in recent years. Total members of PACS as on 31 March 2014 aggregated Rs 13.01 crore of which, borrowing members at Rs 4.81 crore constituted around 39 percent. On the deposit side, these banks mobilized Rs 81,895 crore as on 31 March 2014, indicating a growth rate of 34 percent over the previous year. Currently, all these banks are under stress on account of severe cash crunch and most of them are not functioning.
As mentioned earlier, following restrictions, there has been hardly any business in cooperative banks across the country. Also, since there are no new funds, their lending operations and even ATM services have been it hard. Even large multi-state cooperative banks, like Mumbai-based Saraswat cooperative bank are struggling to get funds for routine transactions of normal customers. The bank sent a text message to its customers on Friday saying, Dear Customer, There is an inadequate supply of currency notes. Hence, we may not be able to allow cash withdrawals in part or full depending on the availability of cash at a particular branch. The situation is likely to improve soon. We request your kind co-operation - Saraswat Bank.
Second, 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.
The question is: What does Narendra Modi-government want to do with these banks and how does it plan to restore normalcy in the sector? The current cash crunch in the sector will likely continue for at least a few weeks, if not months since the government is struggling to execute demonetization even within the commercial banking sector. Or is that the government just does not care about the crisis in cooperative sector triggered by its own policy action?
In states like Kerala, there have been massive protests already. Besides giving a major jolt to the cooperative banking sector, the PM will also risk the wrath of millions of common people - customers, who have deposited money in these banks.
As far as the crisis is concerned, the situation is precarious since most of these banks (especially PACS) are left with very few funds in acceptable denominations. Their credibility has also taken a hit since people will now be scared to park their money in future in these banks due to uncertainty.The current crisis could take the shape of a permanent impairment if cash crunch continues for a few months. It will take a long time for them to recover.