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Did RBI ban district coop banks on hearsay1?

The Reserve Bank of India (RBI) did not have a single case or information related to “irregularities” against any district cooperative bank when it banned exchange and deposit of old currencies at such banks following demonetization.

In a reply to an application under Right to Information Act 2005, the banking regulator has stated it has no data or information available with regards to irregularities committed between November 8 and December 10 in the district or state cooperative banks.

On November 14, barely a week after the announcement of demonetization on November 8, the RBI had barred district cooperative banks from accepting or exchanging the old Rs 500 and Rs 1,000 notes. The abrupt decision led to distress and panic among millions of farmers and rural population, whose only access to formalised banking continues to be through these banks’ network in the rural parts of the country.

The regulator could not provide a single case against any district or state cooperative bank in its response dated January 9. Regarding urban cooperative banks, the central bank’s information officer A G Ray said it would be provided by another department of the RBI.

“The RTI response affirms the Narendra Modi-led BJP government had overturned its decision of allowing note exchange and handling of new currency in cooperative banks, within six days of demonetization, based on ‘unsubstantiated’ accusation of money laundering in these banks. This arbitrary decision affected crores of farmers and rural population,” said RTI activist Anil Galgali, who sought the information from the central bank on irregularities and scams detected in those cooperative banks across India between 8 and 14 November 2016.

“The RBI’s arbitrary decision dented our image to some extent besides creating panic and pain among farmers in those tough days. Many of our customers are forced to open accounts in public sector banks so as to deposit their old notes they usually keep at home for emergency purposes,” said an official from a Thane cooperative bank.

Rural economies in Punjab, Gujarat, Uttar Pradesh, Maharashtra, Kerala, Odisha and many other states depend heavily on cooperative banks. Farmers rely largely on these banks because of their penetration and easier loan disbursals. In Kerala, cooperative banks have total business of more than Rs 1 lakh crore.

“While some cooperative banks are accused of irregularities and scams, a blanket ban (over old notes acceptance and exchange) on these banks mere on hearsay only highlights how clueless the banking regulator was in those 50 days,” said a professor of economics at Mumbai University.