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Published: 27-10-2019

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What is Demonetization?

Demonetization is the act of stripping a currency unit of its status as legal tender. It is needed anytime there is a change of national currency. The old unit of currency need to be retired and replaced with a new currency unit. In 2016, the Indian government decided to demonetize the 500 and 1000 rupee notes, the two most significant denomination notes. These notes accounted for 86% of the country’s money supply. The government’s purpose was to eradicate counterfeit currency, fight tax evasion, eliminate black funds gotten from funds laundering and terrorist financing activities, and promote a cashless economy. By producing the bigger denomination notes worthless, people and entities with huge sums of black income gotten from parallel money systems had been forced to convert the income at a bank which is by law needed to obtain tax info from the entity.

The demonetization initiative triggered a sudden breakdown in India’s industrial ecosystem. Trade across all facets of the economy was disrupted, and cash centric sectors like agriculture, fishing, and the voluminous informal market had been virtually shut down, with several companies and livelihoods going beneath completely – not to mention the economic influence of millions of folks standing in line for hours to exchange or deposit canceled banknotes rather than functioning or carrying out enterprise. “The unbanked and informal economy is difficult hit,” explained Monishankar Prasad, the New Delhi-primarily based author and editor for Alochonaa, an Australian present events publication. “The poor do not have the access to structural and cultural sources to adapt to shock doctrine economics. The poor had been taken completely off guard and the banking infrastructure in the surroundings is rather limited. The tech class has poor exposure to crucial social theory in order to comprehend the effect on the ground.

There is an empathy deficit.” If there is any quick casualty to Prime Minister Narendra Modi’s demonetization exercise, announced on 8 November, that could possibly be for the country’s cooperative banks, which are struggling to keep afloat. Although inefficient, cooperative banks are still essential for the final mile in rural India. This will continue for at least the next five – 10 years till bigger banks/payment banks/modest finance banks take firm hold in rural India. Post demonetization, the cooperative banking sector is gasping for breath on account of a serious liquidity crisis. Soon after the demonetization announcement, cooperative banks have been 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 beneath or requires deposits in new currencies that are hardly available in the system.

This has successfully left many smaller sized cooperative banks with a handful of thousand rupees of funds. “There is practically no organization in the bank for last two months or so. It is going to be tough” stated an official with one of the major cooperative banks, a state exactly where cooperative banks play a essential part in taking the banking solutions to the last mile. Cooperative banks are especially critical for farmers and reduced income groups who want little ticket loans in significantly less time in relation to larger banks.

Influence of Demonetization on Cooperative Banking System

The volume of rural credit in India is mostly for short term credit (1 year) for production of Kharif and Rabi crops and vegetables and medium term credit (3 to five years) for allied sectors such as wells, pump sets, dairy, poultry, horticulture, plantation, and so forth. A modest portion goes to non-agricultural sector such as artisans and tiny business/solutions.

There are 3 types of cooperative banks in India, state cooperative bank, urban cooperative banks and district cooperative banks. Only DCBs have been banned by RBI soon after allegations of cash laundering. But about one hundred urban cooperatives banks are also being probed by the ED. In the first three weeks after demonetization, practically Rs. 12,000 crore worth high-worth cash deposits worth Rs. 80 lakh each and every had been produced by 325 urban cooperative banks from remote districts, This is practically a 25-fold improve in money balance of these urban cooperative banks compared to their last balance on November 7. The government and Reserve Bank of India (RBI) are set to bring out tougher norms for cooperative banks, which have come under scanner for alleged discrepancies and irregularities in the wake of the demonetization drive. According to a recent report by the earnings tax department, most banks have indulged in income laundering following the central government announced ban on high-value bank notes of Rs. 500 and Rs. 1,000 from November 8 midnight. Several banks accepted and exchanged the old currency notes at a premium and parked huge deposits in several accounts, the report added. Additionally, many accounts have been opened with out following Know Your-Buyer norm, the report pointed out. A senior government official stated these banks could grow to be conduits for black cash in the future. At present, the scrutiny and vigilance on these banks is not as stringent as that on scheduled commercial banks. “These banks want to be monitored as meticulously as any other scheduled industrial banks have been used for a huge number of inappropriate activities in the past and these can be utilized for the identical objective in the future” the official, who did not wish to be identified.

Demonetization: Retaining Credibility of Co-operative Banks:

With move to demonetize Rs. 500 and Rs.1000 notes by the central government had a strange fall out when Cooperative Banks which are the backbone of the rural economy, have been paralyzed with the ban of accepting the old currency that are no extended legal tender now.

Operations at 370 district central cooperative banks (DCCBs) and over 93,000 main agricultural credit societies (PACS) have been severely hit with the Reserve Bank of India (RBI) slapping restrictions following the demonetization of Rs. 500 and Rs. 1,000 notes.

In a path to the banks, RBI says that they have advised the Urban Cooperative Banks via its Regional Offices and the State Cooperative Banks through National Bank for Agricultural and Rural Development (NABARD) of the need to have to make sure strict compliance with the guidelines issued with regard to exchange of specified bank notes as also deposit of such notes into the accounts of their buyers. But there were reports that some cooperative banks had been not strictly adhering to the directions issued in connection with the withdrawal of legal tender status of the current Rs. 500 and Rs. 1000 bank notes (specified bank notes). The Reserve Bank of India’s restrictions drive for the duration of the demonetization for the Cooperative Banks who have supplied credit to farmers and three-tier banking program is one particular of the largest in the country. Like the Railways, the Cooperative Banks have also been described as the lifeline of the state’s economy and there had been protests following the RBI choice and the cooperative sector went on strike final week. The government should let Cooperative Banks to function or farmers which have been their source of funds for decades and have all of a sudden turn out to be invalid. Dr. Anand Rai Vyapamm scam whistleblower has rightly pointed out that this step was taken simply because some cooperative banks are dominated by politicians and were reportedly getting employed to launder Rs. 500 and Rs. 1000 notes.

The discrimination towards the Cooperative Banks will place the credibility of the banks at stake. The RBI and the Central Government need to have taken this into consideration prior to meting out discriminatory therapy. The whole chaos will takes away the trust of frequent man from cooperative banks. Customers will feel twice again before depositing their challenging-earned funds or taking a loan against their property from a neighborhood cooperative bank. Due to uncertainty, the people will now be scared to park their cash in future in these banks due to uncertainty as their credibility has also taken a hit. The existing crisis could take the shape of a permanent mutilation if cash crunch continues for a few months and it will take a lengthy time for them to recover. Instead, the government must have attempted to strengthen the infrastructure and capabilities of these banks as an alternative of bringing them on the verge of collapse.

Cooperatives play a significant function.

DCC banks in Maharashtra alone hold almost Rs two,270 crore in such old notes. Several of the state cooperatives are controlled by the NCP and the Shiv Sena has a sizeable presence in their workers’ unions.

There are in all 31 DCCBs, of which Pune DCCB has the biggest deposit of demonetised notes (Rs 811 crore), followed by Satara DCCB (Rs 399 crore) and Nashik DCCB with Rs 365 crore. With their income DCCBs have been locating it hard to raise funds to extend crop loans for the upcoming agricultural season. They were also struggling to meet the government’s directive to offer an advance of Rs 10,000 to every single farmer till the bigger problem of loan waiver was formalized.

Chief executive officer of Kolhapur DCCB, MLA Hasan Mushrif, said, “It is a moral victory for the bank, which has been sitting on Rs 279.78 crore in the form of old denomination notes and incurring losses of Rs 15 lakh as interest on this deposit. The government has not mentioned something relating to compensation for the interest we have lost. Apart from, the note ban tainted our image among the rural masses and has impacted our deposit collection.”


Money crunch is the new norm for most men and women right after demonetization, and some of the worst impacted are buyers of co-operative monetary institutes – banks and societies. One issue with the structure of the cooperatives is that there are a number of regulators. The handle of the Reserve Bank of India (RBI) on state, district and urban cooperative banks get diluted since of this. Also, cooperative banks and societies chose their management through an election process. Given that cooperative banks are largely controlled by politicians, investors also need to be very cautious about their banking practices. If the loans are granted quite effortlessly, the deposits will be at risk. Buyers need to not get lured to banking with a cooperative monetary institution just simply because it does not insist on you giving PAN quantity, or does not deduct TDS on interest, and so forth. If you are not comfy carrying out the due diligence, then it is greatest to steer clear of cooperative banks. Even as factors are on the mend, the troubles – situational and institutional – are nonetheless there. There is certainly trigger for concern, but experts advise against any panic decisions. They insist that investors want to evaluate whether or not or not they are banking with powerful institutions. Alternatively of avoiding cooperative banks altogether, consumers require to do stress on due diligence.
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