Post Demonetisation, Informal Moneylenders Thrive as Cooperative Sector Takes a Hit in Kerala

With Kerala’s cooperative sector jolted by demonitisation and its multi-faceted role in jeopardy, there is no doubt other players are fishing for new opportunities, whether private hospitals or private banks.

The chief minister of Kerala organised a sit-in to agitate. Credit: Kerala state government

The chief minister of Kerala organised a sit-in to agitate. Credit: Kerala state government

In a state that tops the charts for financial inclusion in India, a 65-year-old coir worker’s dream of a job in the Gulf for her son was almost derailed by the crippling of Kerala’s vast network of cooperative banks, only to be rescued last week when she took a loan, at usurious rates, from a non-banking finance institution that was quick to exploit her distress.

The plight of Rosamma, who lives in the town of Attingal in Thiruvananthapuram district, illustrates the disturbing currents sweeping through Kerala’s financial landscape after demonitisation. Despite earning just Rs 10,000 per month, Rosamma was not destitute. She had Rs 200,000, saved over 30 years, lying in a primary service cooperative bank, but was left stranded when after demonetisation her bank fell into the category of cooperative banks that were not allowed to exchange old notes or disburse the new currency.

She desperately needed to pay for visa fees, flights and a recruitment agency’s bill for her son, Dileep, who had secured a job as a construction worker in Dubai. Finally, after being without funds for several days, she allowed a field officer of a non-banking finance institution to talk her into taking a loan of Rs 100,000 – at an interest rate of 25%. Dileep was able to leave for Dubai a week ago but Rosamma has been left asking, like many others, “Why am I in debt? How did my hard earned money suddenly become black money?”

Ironically, Rosamma lives in a state that has one bank for 5,000 people, compared to a national average of one for 12,000 people.

Kerala’s robust cooperative banking sector, with as many as 15,287 banks, 641 labour contract societies, 736 scheduled caste cooperative societies, 98 scheduled tribe societies, 1,152 women’s cooperative societies, 232 fishermen’s cooperative societies, is the main driver of these numbers. About 3.5 lakh Keralites keep their savings in cooperative banks and more than half of all savings in cooperative banks in India, or Rs 1, 40,000 crores, are held in Kerala, mostly in primary and district-level cooperative banks.

A primary corporative society in Anchu Thengue village where the staff are trying to pacify an account holder. Credit: K. Rajendran

A primary corporative society in Anchu Thengue village where the staff are trying to pacify an account holder. Credit: K. Rajendran

It is this very sector, praised, at least in the context of Kerala, by sundry finance ministers and the RBI functionaries, that has now been thrown into disarray. RBI orders in the wake of  demonetisation have curtailed the capacity of  district and primary level cooperative banks to transact business  – far more than that of regular banks – and with their liquidity severely constrained, they are now gasping for breath.

Amid street protests at the financial distress caused by the crippling of cooperative banks and the very real prospect of account-holders being forced to desert these banks for commercial banks, the Kerala legislative assembly convened an extraordinary one-day session on November 22, at which it asked the central government to protect Kerala’s cooperative sector.

An all-party delegation (not including BJP representatives) from the Left Democratic Front(LDF)-ruled state, led by chief minister Pinarayi Vijayan, also tried to meet Prime Minister Narendra Modi on November 23. After failing to get an appointment, Vijayan stressed, in a letter to Modi, that the difficulties imposed on district cooperative banks had led to a “grinding halt of the downstream and upstream cash flows from and to their primaries” and warned that monthly welfare pensions to 44 lakhs of widows, elderly people and other vulnerable groups of people receiving financial support through the primary co-operative institutions were in jeopardy.

While the Centre and the RBI are yet to come up with an adequate response, political salvos are being lobbed by Kerala’s BJP state chief Kummannam Rajashekharan and others, alleging that huge sums of black money are lying in cooperative banks. State BJP general secretary K. Surendran even put a number to this charge, claiming – in a letter to finance minister Arun Jaitley – that Rs 30,000 crore of black money had been deposited in these banks by “politicians, real estate mafias, hawala dealers and terrorists” and asking for action to be taken.

Inevitably, counter-allegations have flown fast and thick across social media about the sums held by BJP leaders in cooperative banks, and the BJP and the RSS’s vested interest in smashing the cooperative banking sector, largely controlled by either elected representatives belonging to the LDF, or the Congress-led United Democratic Front (UDF).

Kerala’s finance minister, T. M. Thomas, has accused the central government of protecting private banks while targeting cooperative banks. In an article in the daily Mathrubhumi, he cited a sting operation three years ago by the investigative news website Cobrapost, which had shown private banks helping their clients convert black money into white to argue that they were not above board.

Amid the cross-fire, one thing is crystal clear: Kerala’s poor have a marked preference for cooperative banks over commercial banks, including public sector banks, even though they charge higher interest rates for loans. (For mortgage loans, for example, cooperative  banks charge around 12%, as compared to 9% in the other banks.) A study conducted by the Centre For Socio-Economic and Environmental Studies (CSES) in Kochi in 2013 showed that 60% of the  rural poor in the state’s Ernakulam district banked at cooperative banks; that 44% of rural poor were indebted to cooperative banks, as compared to 12% to commercial banks. According to CSES, their trustworthiness, the greater ease that customers experience in securing loans from them and a welfarist approach were the main reasons for the dominance of the cooperative sector.

Neethi medical store- a successful initiative by the corporative sector. Courtesy: The cooperative society

Neethi medical store- a successful initiative by the corporative sector. Courtesy: The cooperative society

It is telling that in the current year (2016-17) primary service cooperative banks in Kerala have disbursed Rs 75,000 crores as loans, of Rs 90,000 crore deposited. Their loan-deposit ratio, of around 80%, provides a striking contrast to that of the biggest nationalised bank, State Bank of India in Kerala, which is estimated to be around 52%. Importantly, their role is not confined to banking: they are involved in the selling of agriculture products and  run fair price medical stores. During the festival of Oman, they play a major role in the retailing of goods and are trusted for delivering good quality at low prices. Furthermore, a network of cooperative hospitals contributes greatly to the state’s superior health care services, compared to national standards.

With Kerala’s cooperative sector jolted by demonitisation and its multi-faceted role in jeopardy, there is no doubt other players are fishing for new opportunities, whether private hospitals or private banks.

The case of 76-year-old Ramakrishnan, a retired school teacher and his wife Rajalakshmi, 66, a retired government employee, is illustrative. The couple’s savings – adding up to around Rs 20 lakhs – have long been held in three cooperative banks in Pattambi in Palakkad district. Now, Ramakrishnan is ill and Rajalakshmi needs to withdraw money regularly for hospital expenses. In recent days, she been approached, as have been many others, by representatives of private banks, advising her to transfer the couple’s money, by demand draft, to their banks. Finally, she did sign up with one private bank and has managed to get access to her money.

In the short run, Rajalakshmi has weathered a crisis by changing her bank. But it remains to be seen how Keralites, used to the welfarist style of the cooperative banks, will respond to the bureaucratic methods of  public sector banks or the hard-nosed approach of private banks, which have been known to send out musclemen to deal with loan defaulters.