The government has now permitted district central cooperative banks and post offices to exchange old, demonetised notes with the Reserve Bank of India (RBI). That’s not a surprise, since at some point these entities, stuck with chunks of old notes from customers, had to be allowed to exchange these for new ones. Also, the delay in letting them is primarily due to a KYC inspection exercise Nabard was conducting in cooperative banks for the past several months. This was following allegations that much of the deposits reached these counters in the early days of demonetisation were black money. The government was apparently waiting for this exercise to get over to let cooperative banks pass the old notes to currency chests.
But, what is surprising is a seeming disconnect between the assessments of Income Tax department and the Nabard — the sector regulator for these institutions — as far as the legitimacy of the money received by cooperative banks post demonetisation. Remember, around five months ago, when the country was still dealing with aftershocks of demonetisation, the income tax department wrote to the Reserve Bank of India (RBI) warning that the department has “detected serious unexplained difference between the old notes reported to the RBI and the physical stock” available.
“A big possible window that would have allowed conversion of black money into white, post-demonetisation, by the cooperative bank system was plugged to a larger extent after the I-T department detected these instances,” the I-T department had warned then.
Following this, the tax department began looking at these accounts. It is not clear how far the department has progressed the investigation into these accounts to dig out details of alleged black cash that gas entered the banking system. A person in the know told this writer that during the Nabard inspection it has not found any major cases of violations in cooperative bank accounts. “Most of these deposits were found fine during Nabard inspection,” the person said. In that case, did the taxman issue a false warning?
There is no accurate official estimate available for the amount of money collected by cooperative banks between 10 November and 13 November when these entities were allowed to do so. After banning co-cops from collecting old notes, the RBI had also asked currency chests and banks to accept deposit in old notes from the cooperative banks and even asked them not to show this as part of their cash balances. But, according to estimates, this is anywhere between Rs 6,000 crore to Rs 8,000 crore, half of which is in Maharashtra—around Rs 3,000 crore.
The question is, if the tax department’s communication to the RBI from specific cases in Maharashtra offers any clue and if that holds true for cooperative bank deposits in other states (considering the character is same) as well, how did both Nabard’s and the tax department’s assessments about the money entered in the banking system become so contradictory. If the I-T department is convinced that there have been serious cases of mismatch in the chunk of old notes reported to the RBI and the physical stock, a claim which wasn’t proved during Nabard inspection, shouldn’t the government have waited for more conclusive evidence before letting this money enter the currency chests?
|Value of old notes (Rs 500 and Rs 1000) lying with district co-op banks in Maharashtra|
|as on 18 March 2017|
|Source: Maharashtra State Co-Operative Bank|
For a moment, let’s assume, the taxmen’s warning is true. Then, we are looking at much more black money entering the formal financial system.
This question is particularly relevant since we don’t have so far the actual amount of money returned to bank branches post-demonetisation. The last figure RBI announced was Rs 12.44 lakh crore as on 10 December while an estimated Rs 15.44 lakh crore currency was demonetized. Till then, the central bank updated the figure periodically but post the Rs 12.44 lakh figure there were none.
The RBI has completely remained silent and repeated the excuse that the counting of old notes is on. Once the cooperative bank deposits in old currencies — around Rs 6,000-8,000 crore enter the currency chests, this process could become even more complicated and time consuming.
Another intriguing question is: Why has the RBI washed its hands off the exercise of scrutinising cooperative bank deposits? True, the central bank doesn’t regulate cooperative banks as it does commercial banks. Typically Nabard does this. But, given the critical nature of this operation in the context of demonetisation, this was a special situation. Also, Nabard has far less infrastructure and expertise compared with RBI to unearth foul play involving fake currency/ black money. It is more of a nodal agency focusing on agriculture and rural infrastructure development. The central bank should have taken the lead to examine the post-demonetisation deposits in cooperative banks, notorious for political intervention, corruption and gross mismanagement. Its absence in the operation is questionable.
Third, there are different layers of cooperative banks — multi-state, district, urban and primary rural cooperatives. In the three days after demonetisation (10 December-13 December), when these entities were open to accepting old notes, there are possibilities that unaccounted money found its way to these entities in the form of backdated deposits. So, is the possibility of deposits reaching these banks even after 14 November. The counter argument to this assumption is that such manipulations are not possible wherever operations are done through core banking solution. But what about smaller cooperative banks where there is no core banking solution, not even good software? The money from these banks too have reached district cooperative banks. Given the loose regulation and vulnerability of these institutions, a closer look at these aspects would make sense if the idea is to prevent bad money entering the formal system.
Apart from these, senior officials in the cooperative sector highlighted another aspect — how will these old, demonetised notes be accounted after RBI accepts this money? The problem is this. After RBI restricted co-operative banks either to accept old notes or to deposit the money in the currency chests, it also told these banks not to treat the old high value notes as part of their balance sheet. Hence, this money was kept in separate accounts for these eight months. There is a carry cost for these banks. How will they compensate the customers with due interest payments on deposits these banks haven’t been able to deploy, so far?
One can’t rule out the possibility of corrupt local politicians, who are influential in cooperative banks, using these entities to whiten their illicit money. The taxman’s warning in January is an eye opener and needs a much deeper look, especially given that now these deposits are set to enter the currency chests.
The question that should be asked is whether political influence has played its part in letting more black money enter the system at a time the nation is fighting the evil of a parallel economy.[“Source-ndtv”]