Demonetisation in Kerala: Curbs on cooperative banks are hurting Non-Resident Keralites - Firstpost
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Demonetisation in Kerala: Curbs on cooperative banks are hurting Non-Resident Keralites


Kerala is one of the few states where demonetisation of Rs 500 and Rs 1,000 currency notes generated so much heat. The state witnessed a rare phenomenon of the entire state Cabinet sitting on a day-long dharna with the mutually acrimonious ruling party and the Opposition joining hands against the Union Government over the issue.

Economic experts are wondering why the demonetisation move aimed at flushing out black money has met with so much protest in Kerala, which incidentally is the country’s first total banking and completely digitised state. They feel it could be because of pressure from the black money lobbies.

Firstpost spoke to a cross-section of experts to get a dispassionate view of the situation. This is the second in a four-part report. You can read the first part here.

The demonetisation of high-value currency has brought the cooperative banks in Kerala under glare. The decision of the Reserve Bank of India (RBI) to keep them out of the currency exchange business has put the entire sector with a network of over 2,500 branches across the state in the dock. The decision has pushed the ruling and Opposition fronts led by the Communist Party of India (Marxist) and the Congress respectively to the path of agitation. After completing a series of separate agitations, the two are gearing up for a joint strike against the Centre over the alleged discrimination shown to the cooperative sector.

Representational image. Reuters

Representational image. Reuters

Chief Minister Pinarayi Vijayan, who sat on a day-long dharna along with his cabinet colleagues before the RBI office in the state capital on Friday, has accused the Narendra Modi government of trying to destroy the sector that caters to nearly one crore people, especially in the rural areas, with a huge deposit of Rs.1.27 lakh crore.

However, the BJP, which is struggling hard to defend Prime Minister Narendra Modi’s policy, has seen red in the unusual union of the bitter political rivals in the state against the Central government. Senior leaders of the party say that the two had joined hands as they may have stakes in the black money stashed in the cooperative banks. They have defended the RBI decision saying that it was prompted by the unwillingness of the cooperative banks to follow the RBI’s banking norms in their operations. They feel this may be because black money is the lifeline of cooperative banks in the state.

BJP general secretary K Surendran alleged that many politicians in the state had parked unaccounted money in the cooperative banks. He alleged that a prominent leader had deposited defunct currency notes worth Rs 12 crore in a cooperative bank in Kannur a day after demonetisation was announced. Surendran has asked the bank to furnish the details of all deposits received by them since 8 November. He said that many were depositing black money in cooperative banks as they don’t have to disclose the source. He said that this had encouraged hawala dealers, the real estate mafia and even terrorists to launder money through cooperative banks.

Describing the cooperative banks as a den of black money, the BJP leader has submitted a memorandum to Union Finance Minister Arun Jaitley to verify the money deposited in cooperative banks across the state and requested him to take the necessary action against tax evasion. The Income Tax Department has already begun the process. It has started issuing notices to cooperative banks to furnish details of the deposits. The I-T men are trying to take advantage of the helplessness of the depositors in pulling back the deposits in the current situation.

They are not able to withdraw the deposits since cooperative banks have not been provided with new currency notes. Cooperative banks have to go to regular banks to exchange the defunct notes. Since the current restriction on the withdrawal of money is applicable to cooperative banks as well, they will not be able to disburse large amounts at present. The black money estimated by the I-T departments of cooperative banks in Kerala is roughly Rs 30,000 crores. Leaders of both the LDF and UDF have denied the allegations. They have termed it as a figment of the imagination.

Leaders of both the front say that the BJP had taken up this to run a campaign against the cooperative banks. This is deliberate attempt to destroy the sector that plays a vital role in the state’s economy and rural prosperity.

“Cooperative banks came into existence in Kerala even before the formation of the state. It was part of a people’s movement to free the people from the clutches of money lenders. The BJP is trying to destroy this as they have not been able to make any inroads into the cooperative sector in the state”, said CPM MP A Sampath, who has been involved in the cooperative sector from his youth.

VD Satheeshan, vice-president of Kerala Pradesh Congress Committee (KPCC), suspects a conspiracy to drive the huge deposits from cooperative banks to regular banks. He said that those behind the conspiracy were trying to do this by showing the cooperative banks in poor light. “The cooperative banks are following the principles of banking as laid down by the RBI but they are not allowed to take part in the demonetisation drive. This will paralyse the functioning of these banks resulting in a mass exodus of accounts,” says Satheeshan.

However, a former senior official of the State Cooperative Bank (SCB) in Thiruvananthapuram told Firstpost that the claims of the political leaders were true only in the case of state and district cooperative banks (DCB) that are fully computerised and function according to RBI norms. The SCB has 20 branches and the 14 DCBs have 716 branches across the state.

The former official, who did not want to be identified, said malpractices were taking place in the 46 Primary Cooperative Agriculture and Rural Development Banks (166 branches) and Primary Agricultural Credit Societies (1,638 societies) located in rural areas.

“Earlier, the customers in these institutions were mostly farmers and small traders, who deposited money in the banks only after striking a deal or selling some property. The situation changed after the Income Tax men started keeping track of banking transactions. This forced many from cities and towns to park unaccounted money in cooperative banks in rural areas,” he said.

Even Non-Resident Keralites have opted for cooperative banks for parking their money. Sharjah-based Pravasi Bandhu Welfare Trust chairman K  Shamsudheen said that the NRKs were showing preference for cooperative banks as they were offering higher interest rates — compared to commercial banks — without paying tax.

The current interest offered by commercial banks on NRE deposits is between six and seven percent while the cooperative banks offer between nine and 10 percent for one-year terms and beyond. Shamsudheen said that a large number of NRKs in West Asia had deposits in cooperative banks. He told Firstpost that many also had illegal resident accounts in commercial banks along with their NRE accounts. They have opened such accounts and deposited money in them in connivance with bank officials, said Shamsudheen, who has been running a campaign to cultivate saving habits among expatriates.

This perhaps explains high growth in the domestic deposits in commercial banks in the state in the recent years. The state-level bankers committee reported an increase of 71.31 percent in the domestic deposits in Kerala during 2014. The domestic deposits in the banks as on 31 December, 2014 were Rs 3.3 lakh crores.

File image of Pinarayi Vijayan. PTI

File image of Pinarayi Vijayan. PTI

Curiously, the NRE deposits grew only by 15.77 per cent during the period. The high growth of domestic deposits despite the recession has been baffling economists. VA Joseph, former managing director of Thrissur-based Catholic Syrian Bank, feels that the higher interest offered by banks and opening of new accounts under the Pradhan Mantri Jan Dhan Yojana could be the main factors behind the sudden jump in the domestic deposits.

Economist Mary George does not agree. She said that the huge infusion of money into the domestic accounts could be the result of attempts by some people to legitimise the unaccounted money. Shamsudheen said many in the UAE, who deposited hawala money in resident accounts in regular banks, have started getting notices from the Income Tax department.

“Such a person in Dubai approached me for advice on how to save the money he illegally parked in a resident account in a private bank. There are many like him in West Asia. Demonetisation has put them in a big panic,” says Shamsudheen.

The I-T department put the cooperative banks under their scanner after they noticed a huge increase in their deposits in the past decade. However, their attempt to gather details of the deposits was resisted by the banks. A section of the banks even approached the Supreme Court against I-T scrutiny. The department investigation revealed that cooperative banks were the favourite channel for the real estate mafia, hawala dealers, corrupt officials and even politicians. They find it easy to deposit up to Rs 10 lakh in primary cooperative societies as they don’t have to report it to the RBI and I-T department. If the amount is higher, the banks help them in depositing money under fictitious names.

A primary cooperative society in Kozhikode district advised an NRK from Dubai to deposit the Rs 28 lakh he received from the sale of land in multiples of Rs two lakh. The bank employees facilitated the deposit of the entire amount by creating accounts in 14 names — most of them fictitious. Shamsudheen said that the man was now in a panic after the cooperative society failed to clear his doubt on recovering the money. Similarly, a Dubai-based woman, who put Rs 50 lakh in a cooperative bank in Kollam district, is confused after the bank expressed its difficulty in giving her the entire sum in one go.

The bank apparently cannot give more than Rs two lakh to a customer in one transaction as it could be hauled up by the I-T department. Shamsudheen said that the cooperative bank had advised the women to accept the money in different names. Shamsudheen added that demonetisation had put the customers of the cooperative banks in a total quandary. The NRK, who has been advising expatriates on safe investments, said that he was getting large number of calls from Keralites from all over the world day and night seeking his advice on their deposits in cooperative banks.

Thousands of people, who deposited money in cooperative banks thinking they will be as safe as in Swiss banks, are now in a panic. The hapless depositors are pinning their hopes on the agitation being launched by the ruling and Opposition fronts to get their money back.

Part One: Hawala, fake notes play big role in state's economic growth

Part Three: Terror outfits use contraband money to indoctrinate youths

First Published On : Nov 22, 2016 11:29 IST

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