Impact of Demonetisation on Kerala’s financial institutions…

Kerala has a intriguing financial history of its own. The region has a long history of trade (rice and spices) and this has led its economy to be monetised much before we understood the term. This monetisation has led to the region looking for ways to mobilise and channelise finances. Thus, the region has been home to the oldest form of financial intermediation – chit funds. The chit funds soon spread across the region.

As joint stock banks became popular, some of the chit funds evolved to large number of small community driven banks. Most of these banks were forced to close following failure of Palai Central Bank in 1960. There were some 100 plus banks in the State in 1959 which declined to 7 odd by the time of bank nationalisation in 1969.  The region also had a prominent State sponsored Bank of Travancore which was made part of SBI group. Then there are cooperatives which are spread across the State. The State historically has the lowest number of people per branch which (I think) continues till date.

So, impact of demonetisation can also be seen from its impact on various financial institutions in Kerala.

K Rajendran of Wire has a piece:

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

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.

Interesting bit..



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