Demonetisation: Not all co-op banks are bad but political black money in them must be probed

In the early days of demonetisation, a sharp jump in deposits  of Jan Dhan bank accounts raised many eyebrows. In just a fortnight, about Rs 21,000 crore fresh deposits had reached these accounts, which were originally opened for unbanked, poor population in the hinterland.

This naturally raised the suspicion of authorities that these accounts were used by the hoarders of black money, to get their money into banking system in small doses using benami accounts and escape taxmen’s scrutiny. Such accounts are now being inspected. But, there may be an even bigger scam that went unnoticed when the black money was dumped into cooperative banks by corrupt politicians and others with ill-gotten wealth. These institutions are loosely regulated and hence more prone to foul plays.

 Demonetisation: Not all co-op banks are bad but political black money in them must be probed

Representational image. PTI

Two media reports appeared today points to this possibility. According to a report in Times of India, the district credit cooperative (DCC) banks in Maharashtra alone got Rs 5,000 crore in old notes in banned denominations of Rs 500 and Rs 1,000 in just four days, between 10 November to 14 November, when they were allowed to accept old currencies. Soon, the government banned cooperative banks from collecting old notes in exchange of new notes.

According to another report in the Economic Times, which quotes an unnamed tax official, “several banks and societies — which were disallowed from either exchanging or accepting the old 500/1,000 rupee notes as deposits — may have booked back-dated fixed deposits by either shutting down or manipulating their computer systems.”

An official in one of the Kerala-based cooperative banks told Firstpost that these two possibilities very much exist. There are numbers to prove that in the initial days when cooperative banks were allowed to take money, a substantial chunk of deposits reached commercial banks from cooperative banks.

Cooperative banks typically park their money in scheduled commercial banks. These small lenders faced a major jolt when they were barred from taking deposits in old currency and when their money got locked in commercial banks, which too were facing a cash crunch. There is certainly reason to suspect that this could be black money held by politicians since most, not all, of the co-operative banks are controlled by local politicians and are lightly regulated. The second scenario, backdating the FDs (fixed deposits) by manipulating the accounts needs to be probed and the crooks should be brought before the law.

Cooperative banks in numbers

Cooperative banks aren’t big in relation to commercial banks but, over years, they have gained size and reach in rural areas, where density of larger banks is less. 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 93,042, as per the latest data available. The decision to bar cooperative banks from taking old notes is well understood given that the checks and balances at these banks aren't perceived to be strong enough to counter efforts to push black money into the system.

These banks aren't as tightly regulated as scheduled commercial banks. But the government could have put restrictions on deposits and exchanges for these banks instead of putting a blanket ban on all. As wrote in an earlier Firstpost column, the RBI and NABARD had conducted a review of the cooperative banks in the country since 2010 and had revoked licences of many loss-making banks. Since then, the performance of the remaining lot has improved.

According to data from Nabard, 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. These lenders have a total loan outstanding of Rs 1,14,545 crore as on 31 March 2015 with an impressive loan recovery percentage almost 95 percent.

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. These banks' accumulated losses decreased to Rs 617 crore as on 31 March 2015 from Rs 696 crore as on 31 March 2014.

These institutions play a critical role in offering banking services to the low-income groups, mainly farmers, especially given that the banking correspondents (BCs) model hasn't worked well in the hinterland. 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. Just like the suspected foul play in Jan Dhan accounts, it is taxmen’s task to investigate how much black money has entered the system through cooperative banks post demonetisation, but it isn’t wise to paint all with the same brush.

Updated Date: Dec 15, 2016 13:08:44 IST