If there is any immediate casualty to Prime Minister Narendra Modi’s demonetisation exercise, announced on 8 November, that could possibly be for the country’s cooperative banks, which are struggling to stay afloat. Besides damaging the health of this sector, PM Modi also risks losing political goodwill if he chooses to let these institutions die as they primarily deal with people at the bottom of the pyramid.
Post demonetisation, the cooperative banking sector is gasping for breath on account of a severe liquidity crisis. Soon after the demonetization announcement, cooperative banks were 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 below or take deposits in new currencies that are hardly available in the system.
Cooperative banks are particularly important for farmers and lower income groups who want small ticket loans in less time in relation to larger banks. The banking correspondents (BCs) system hasn’t worked well so far though. 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.
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 93042, as per the latest data available.