 "New Rs 2,000 note issued after the central government announced its demonetisation policy on November 8")
It is surprising that the District Cooperative Credit Banks (DCCBs) are sending strong feelers to the Reserve Bank of India (RBI) and finance ministry that they want to act as cash dispensers for the rural economy, at a time when one would expect them to be happier being spared the role.
They have plenty of trouble on their hands, as their regulator, Nabard, notes in its latest annual report (2015-16). According to the report, there are 14 supervisory concerns regarding the cooperative banking structure. These include “poor corporate governance in cooperative banks” and “non-compliance of KYC/anti-money laundering standards”. When decoded, it means that a currency chest sent to some of them could end up in the wrong hands, as they would not be able to do any due-diligence from those coming to exchange Rs 500 and Rs 1,000 notes.
DCCBs are the middle rung of the three-tier cooperative banking structure. At the top are the state-level cooperative banks and at the bottom the primary agriculture credit societies. Urban cooperative banks stand on a different pedestal. RBI has allowed both urban and state cooperative banks the role of money changer. The DCCBs feel left out.
These are enough reasons why RBI has decided that it would not depend on the DCCBs for the countrywide demonetisation programme. A reading of Nabard’s concerns as listed in its annual report on the basis of its evaluation of data from the 370 DCCBs shows why RBI is right to do so.
The report also makes it clear why the DCCBs are the weak links in the rural credit outreach, set against a far better performance scored by the regional rural banks, or even the humble self-help groups.
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So, even though Nabard falls under the regulatory purview of RBI, the latter has decided not to take a risk with the DCCBs. For instance, almost 18 per cent of the DCCBs fall short of the minimum share capital requirement of holding at least 7 per cent capital adequacy ratio as set by RBI. In other words these cooperative banks are at risk of going belly up.
“The low CRAR was mostly owing to the inability of cooperative banks to raise capital funds in proportion to their risk-weighted assets, as well as high level of NPAs,” the regulator’s report notes. Remember the DCCBs are almost entirely owned by local political bosses. And, unlike banks, DCCBs fail by the dozens. As we sit here, the central and state government, with the stewardship of Nabard, are trying to reopen (not revive) 20 DCCBs that had shut shop. Only two of them have reached the stage to get a fresh licence.
The report also makes it clear that there are still huge gaps in putting these banks on an IT-based banking platform, on a par with commercial banks. The regional rural banks are already there, but the DCCBs will take time.
So even as DCCBs have sob stories of sitting on piles of cash that they cannot use, the solution clearly does not lie in letting them connect with the stretched banking system, till December 30. They can easily become the weak links for laundering of black money. The implication of putting wads of cash either as deposits meant for onward transmission to RBI or for disbursement to the public in a risky environment where many of the DCCBs cannot manage themselves can be easily guessed.
