KP Nigil was looking forward to the New Year, when he was set to open a franchisee of a leading food chain in his hometown Kozhikode, in northern Kerala. He had already spent ₹7 lakh, including ₹6 lakh as advance for the shop’s lease. Nigilhad raised the money against a deposit of ₹25 lakh at the Calicut City Service Cooperative Bank, the largest primary cooperative bank in Kozhikode.

The twist to the happy story came when the Reserve Bank of India (RBI) put curbs on cooperative banks, barring them from accepting and exchanging old notes, following the demonetisation move by Prime Minister Narendra Modi. The regulator, it was said, wanted to prevent black money and laundering in these banks, which were supposed to be highly politicised.

The restriction meant that Nigil couldn’t withdraw money from his bank, which didn’t have access to the new notes. Most of the cooperatives are now dependent on their ‘regular’ peers for the new currencies. This also squeezed these banks’ ability to give credit to their customers, most of whom are farmers and small businessmen.

“I am keeping my fingers crossed,” said Nigil. “The delay in getting the remaining funds is frustrating. All my calculations have gone wrong. I have already taken a 1,300 sq ft outlet in the city for a monthly rent of ₹27,000, the first of which is due on January 15. I am not sure when I can start the new business,” he added.

PJ Muraleedharan, a goldsmith in East Kadungallur in Ernakulam, is facing a similar dilemma. He is remodelling his house, but can’t withdraw enough money from his account in Kadungallur Cooperative Service Bank. The currency shortage has proved to be a spoiler and he is finding it difficult to pay wages and procure building materials.

The bank has agreed to release ₹48,000 in two instalments, but that is too meagre, forcing him to pause work for the moment. “The stoppage of work in other construction sites in the vicinity due to cash-related problems has ensured adequate labour supply in my site. But I’m not able to ensure payment of wages.”

The discontent is now widespread in Kerala, which has among the biggest cooperative networks in India with 11,565 active societies with a total deposit of ₹1.83 lakh crore, according to information tabled in the state assembly. The network is like a lifeline that runs through the state, with over two million members.

While there are many businessmen like Nigil whose plans have gone kaput, there have been reports of the cash crunch postponing surgeries and weddings.

Cooperative banks enjoy a rich legacy in the state, as they have been providing credit to farmers since the 1950’s, much before commercial banks could find foothold. “The decision to deny cooperative banks the facilities available to other commercial banks is a clear case of arbitrariness and discrimination”, said VK Prasad, Director, EMS Study and Research Centre, Kochi.

The structure

Cooperative credit structures evolved on the concept of mutuality in which thrift and credit functions go hand-in-hand. But in India, the structure has focused on credit. While the primary level cooperatives are agencies for credit dispensation, the upper tiers were created to ensure that the lower ones got refinanced.

The cooperatives have thrived in the un-banked rural outback of the country for over a century. But their reach and function vary. While the density of cooperatives is high in states such as Maharashtra and Kerala, it is low in the North-East. In some regions they generate resources only from members. But in states such as Kerala, primary agricultural credit societies (PACS) collect deposits from non-members too.

The structures also differ. While Andhra Pradesh has a single unified structure, most of its peers, including Kerala, have a three-tier structure, comprising of PACS, District Central Cooperative Banks (DCCBs), and State Cooperative Banks (SCBs).

The SCB provides funds to DCCBs from its own resources and refinance from National Bank for Agriculture and Rural Development (Nabard). The DCCBs in turn provide funds to PACS.

Primary banks are known to keep some of their deposits the district banks which in turn park some with the SCB, leaving a net total deposit of ₹1.38 lakh crore. Apart from the money used for disbursing loans and separately maintained as statutory deposits, the cooperative banks hold a surplus fund of ₹1,161.36 crore. Unclaimed deposits idling in these banks add up to ₹80.86 crore. These statistics match, or in some cases even surpass the best in the country.

But the system is now facing an existential crisis let loose by demonetisation, a financial storm ripping through an otherwise tranquil cooperative landscape, and disrupting lives, upsetting livelihood, unsettling institutions and spoiling some assiduously built reputations.

The collateral damage is most pronounced in Kerala because of the sheer expanse and outreach of the cooperatives in the state and the often disproportionate influence it has come to wield in everyday life, specifically for those excluded from mainstream banking facilities.

For the PACs at Kerala’s grassroots level, the demonetisation has cut into their deposit and credit facility with the DCCBs. By law, they are required to park their excess cash with the 14 DCCBs in the state. But the RBI has fixed their withdrawal limit at ₹24,000 per week (₹50,000 for current accounts). This is at the root of the ongoing upheaval, for which the DCCBs moved the Supreme Court.

The cooperative network in Kerala includes 14,896 cooperative societies functioning under the State Registrar of Cooperative Societies (RCS) out of which 11,565 are active, 2,665 are dormant and 666 face a threat of liquidation, because of - as detailed by the Kerala Economic Survey - poor governance and management, lack of professionalism, operational inefficiency and obsolete infrastructure.

But that is not the reason why the RBI has come down heavily on them. A report of the Task Force on Revival of Rural Cooperative Credit Institutions in 2007 had noted that the governance structure in cooperatives has been impaired because of politicisation; directors on boards of cooperative banks are active in politics, at the state, district, or taluka.

Political expediency has led to laxity in ensuring quality of credit and its repayment. The ritualistic write-off of loans of farmers has spawned a series of schemes by the states, announcing waivers of various magnitudes, ranging from interest write-off to partial loan write-offs. This has also made cooperatives a conduit for distributing political patronage, leading to parties vying with each to control these cooperatives.

Not only that. Rumour mills are now abound, fuelled by a political slugfest, that cooperatives were used to park illegitimate money using benami accounts.The allegation has been strongly contested by the political class, well, almost.

Political colour

Demonetisation and its aftermath have acquired inevitable political overtones in Kerala. The Congress- and the CPI(M)-led formations rule the roost in the administrative echelons of the cooperatives in which positions are filled with cronies based on elections fought as fiercely as those to the State Legislature.

The Bharatiya Janata Party (BJP) is a recent entrant into electoral politics in the state and managed to send its first-ever member into the Legislature in the last Assembly elections.

Recognising its opportunity, BJP has been the most vocal critic about the functioning of the cooperatives. This has only helped consolidate the rival formations of Congress-led United Democratic Front and the CPI(M)-led Left Democratic Front against the ‘machinations’ of the Centre which were ‘instigated suitably’ by the state unit of the BJP.

Rarely, if ever, have these rival formations come together for a common cause – but no wonder either, since the very existence of the cooperatives that they lord over is at stake unlike at any time during the acrimonious past.

Responding to allegations that cooperative banks are stashing away black money, MM Monaye, former CPI(M) MLA and a veteran of the state’s cooperatives sector, said: “Primary cooperative societies and banks are legally permitted to accept deposits from the public based on the RBI guidelines. They have been exempted even from paying income tax for the revenue earned from banking operations.”

The former head of the state’s largest cooperative bank added: “All the deposits are accountable and will be audited by various government agencies. Perhaps, a high percentage of interest rates may be an added attraction for customers to park their deposits with cooperative banks. However, all the deposits above ₹25 lakh come under the scanner of Income Tax department. Therefore, there is no question of hoarding black money in cooperative banks.”

The allegation about money being laundered by cooperatives has largely fallen on its face, says E Shamsudeen, President of the Thiruvananthapuram District Cooperative Bank. Official statistics show that the incremental ‘specified bank notes’ (banned notes) held by the DCCBs in the country during November 8 to November 14 was ₹7,946.9 crore only. This amounted to only 0.96 per cent of the total notes collected ( ₹8.25 lakh crore) by all banks as on November 14. It made up just 2.7 per cent of the total deposit base of DCCBs at ₹2.9 lakh crore.

Critics of the banking regulator say that this shows that there has been no alarming rise in or disproportionate collections of the banned notes by the DCCBs during the five days between November 10 and November 14. While reports say that the cooperatives in Kerala have got the highest deposits between November 8-14, officials say it is only but natural given the state’s extensive network.

The state government is not taking things lightly, as evidenced in its latest resolve to go to the people and rally support against the alleged attempts of the Centre to destroy Kerala’s cooperative banking structure. Kadakampalli Surendran, the state cooperation minister, said that an estimated two lakh members of the cooperative movement along with political leaders will visit 64 lakh homes in the state during an ongoing campaign to explain the move’s impact.

Sources in the government, none of whom wanted to come on record, say that fears about the cooperatives’ vulnerability are exaggerated.

The urban cooperative banks, state cooperative banks, the DCCBs, and cooperatives and primary societies are registered under the State Cooperatives Societies Act. They are under the administrative control of the state government for which rules have been framed under the state Act. But the state cooperative bank, the DCCBs and the urban cooperative banks are also covered within the meaning of ‘banking companies’ and therefore brought under the purview of banking regulation. “This aspect puts paid to allegations that the cooperatives are not licensed, inspected, supervised or even regulated,” says a combative ES James, president of the Chakkittappara Service Cooperative Bank in Koilandy taluk in Kozhikode district.

Also, core banking facility, or the basic computerised environment in banks, is available in 95.4 per cent of the DCCBs across the country. Fake note detecting machines are available 74.06 per cent of the branches, according to data collated form the RBI and DCCBs.

The credible infrastructure underlines the importance of cooperatives, including in Kerala. But with the two sides of the political establishment at their confrontational best, it is difficult to predict if the New Year will bring good tidings for the likes of Nigil and Muraleedharan.