Currency exchange ban: Kerala chief minister says Centre, RBI strangling cooperative banks

With Kerala’s cooperative banks in crisis after being denied permission to exchange currency in the wake of demonetisation, Chief Minister Pinarayi Vijayan accused the Union government and Reserve Bank of India of “trying to strangulate” the financial institutions. In a Facebook post on Thursday, he said, “We will strongly oppose such moves.”

The post also announced that the Communist Party of India (Marxist) leader would stage a demonstration, with his cabinet colleagues, in front of the Reserve Bank office in Thiruvananthapuram on Friday.

Primary cooperative banks were stopped from accepting and exchanging denotified Rs 500 and Rs 1,000 notes amid allegations that money laundering was taking place through these institutions.

On Wednesday, the sector remained shut and protests were organised across the state. The response in Kerala to the alleged move to sideline cooperative banks is perhaps the strongest among states. There is a good reason for this. An estimated 10 million people rely on the state’s four-tier cooperative banking system – which comprises 20 State Co-operative Banks, 60 Urban Co-operative Banks, 784 District Co-operative Banks and 1,611 Primary Co-operative Banks. The primary banks account for 80% of the total deposit.

The state, district and urban banks follow Reserve Bank guidelines, while the primary banks come under the district banks and follow the directives of the Registrar of Cooperative Societies. All primary cooperatives deposit money with the RBI-monitored district banks, making them legal financial institutions.

Money laundering?

For the first three days after the withdrawal of high-value currency notes from November 9, the Reserve Bank allowed primary cooperative banks across the country to accept the demonetised notes as deposits from account holders. Within this period, the banks collected Rs 280 crores worth of the old notes, though they did not give out new notes.

But after allegations that large amounts of black money were being deposited in primary cooperative banks, the central bank withdrew permission to these banks to exchange currency. State and urban cooperative banks, however, continued to accept the scrapped notes and issue new ones.

The money laundering fears were compounded by the fact that many primary cooperative banks do not follow the KYC (know your customer) process.

The matter took a political turn with the Bharatiya Janata Party alleging that the ruling CPI(M) and the Opposition Congress had stashed illegal money in cooperative banks. Chief Minister Pinarayi Vijayan hit back, accusing the BJP of wanting to destroy the cooperative banking sector in Kerala, the largest in the country.

“The decision to impose restrictions on cooperative banks is a political conspiracy hatched by BJP leaders in Kerala,” he told a press conference in Thiruvananthapuram on Thursday. “Cooperative banks function under laws passed by the Kerala legislative Assembly. The income tax department can conduct inquiries if they find fault with the cooperatives.”

Depositors suffer

Balakrishnan, a 61-year-old retired school teacher, was in for a shock when he went to collect the monthly interest on his deposit at a Calicut City Service Cooperative Bank branch in Kozhikode on Wednesday. The manager told him the bank had run out of money and the interest had been credited to his account.

“I deposited the entire retirement benefit in the bank and I use the monthly interest to buy medicines,” Balakrishnan said. “Now, I don’t know when I will get the money.”

The Calicut City Service Cooperative Bank, with 24 branches in Kozhikode corporation and a deposit of over Rs 1,000 crores, is one of the large cooperative banks in Kerala.

“The CCSCB is a primary cooperative bank and we cannot accept notes nor disburse new notes,” said general manager Saju James. “We get Rs 50,000 from Kozhikode District Bank every week. How is it possible to meet the demand from 24 branches with the meagre amount?”

He said the majority of depositors at the branch were retired government servants and senior citizens who did not hold accounts in other banks. “They depend heavily on monthly interest on their deposits to meet medical expenses,” he added. “And they are feeling the pinch of the currency crisis.”

James pointed out that the bank can tide over the crisis only if it gets an exchange permit. “Our customers will be in huge trouble if we do not get the exchange permit immediately,” he said.

Legacy of cooperatives

The cooperatives go back a long way in Kerala. “They provided credit for farmers in the 1950s and 1960s, years before commercial banks found a foothold in the state,” said Dr BA Prakash, chairman of the fifth Kerala State Finance Commission, adding that no one should ignore the legacy of the cooperative banking sector in Kerala.

“There are allegations of stashing black money in cooperative banks,” he added. “It should be examined thoroughly to make it transparent.”

Prakash said the withdrawal of the currency exchange permit had paralysed the cooperative sector. “Cooperative societies are public institutions and they have a proper audit system,” he said. “They should be protected at any cost. Failure of the cooperative sector will strengthen the blade mafia.”

CP John, former Planning Commission member, said it was deplorable that the government allowed post offices and petrol bunks to conduct money transaction but not cooperative banks. He, too, pointed out that credit cooperative societies are affiliated to district cooperative banks, which run on the guidelines of the Reserve Bank.

“Cooperative bank societies are democratically elected institutions,” he added. “They follow guidelines for membership and it is a financial institution where customer can go with power.”

John warned that the Union government’s move to discredit cooperatives “will provide ideal fodder for new generation banks to widen its presence in Kerala”.