Index IntroductionImpact of Demonetization on Cooperative Banking SystemDemonetization: Preserving the Credibility of Cooperative BanksCooperatives play an important roleConclusionIntroductionDemonetization is the act of depriving a monetary unit of its status as legal tender. It is necessary whenever a national currency change occurs. The old monetary unit must be retired and replaced with a new monetary unit. In 2016, the Indian government decided to demonetize the 500 and 1000 rupee notes, the two largest denominations. These notes represented 86% of the country's cash supply. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get Original Essay The government's objective was to eradicate counterfeit currency, combat tax evasion, eliminate black money obtained from money laundering and terrorist financing activities, and promote a cashless economy. By rendering larger denomination notes worthless, individuals and entities with large sums of black money obtained from parallel cash systems have been forced to convert the money at a bank that is required by law to acquire tax information from the entity. The demonetisation drive has caused a sudden collapse in India's business ecosystem. Trade in all aspects of the economy has been disrupted and cash-centric sectors, such as agriculture, fishing and the voluminous informal market, have been virtually shut down, with many businesses and livelihoods collapsing completely, never to talk about the economic impact of millions of people in difficulty. queuing for hours to change or deposit canceled banknotes instead of working or doing business. “The informal and unbanked economy is hit hard,” explained Monishankar Prasad, author and editor of Alochonaa, an Australian current affairs publication based in New Delhi. “The poor do not have access to the structural and cultural resources to adapt to the shock doctrine of the economy. The poor have been caught totally off guard and the banking infrastructure in the surrounding area is quite limited. The tech class has little exposure to critical social theory to to be able to understand the impact on the field. There is a deficit of empathy." If there was an immediate casualty in Prime Minister Narendra Modi's demonetisation drive, announced on November 8, it could be for the country's cooperative banks, which are struggling to stay afloat. Although inefficient, cooperative banks are still crucial to the last mile of rural India. This will continue at least for the next 5 - 10 years, until larger banks/payment banks/small finance banks gain a foothold in rural India. Post-demonetisation, the cooperative banking sector is reeling from severe liquidity crisis. Soon after the announcement of demonetisation, cooperative banks were asked not to accept the old Rs. 500, Rs 1,000 note deposits or exchange those notes for the new notes. This meant that these lenders could only deal with permitted denominations of Rs 100 and below or accept deposits in new currencies that were difficult to find in the system. This has effectively left many smaller cooperative banks with a few thousand rupees of funds. “There has been virtually no business in the bank for about two months. It will be tough,” said an official of a leading cooperative bank, a state where cooperative banks play a crucial role in taking banking services to the last mile. Cooperative banks are particularly important for farmers and low-income groups who wantsmall amount loans in less time than larger banks. Impact of Demonetization on Cooperative Banking System The volume of rural credit in India is mainly for short-term credit (one year) for production of Kharif and Rabi crops and vegetables and medium-term credit (three to five years) for related sectors such as wells, pump sets, dairy, poultry, horticulture, plantations, etc. A small part goes to the non-agricultural sector such as artisans and small businesses/services. There are three types of cooperative banks in India: state cooperative banks, urban cooperative banks and district cooperative banks. Only DCBs were banned by the RBI after allegations of money laundering. But around 100 urban cooperative banks are also under probe by the ED. In the first three weeks after demonetisation, almost Rs. High value cash deposits worth Rs 12,000 crore. 80 lakh each was made by 325 urban cooperative banks of remote districts. This is a nearly 25-fold increase in the cash balance of these urban cooperative banks compared to their last balance on November 7. The government and the Reserve Bank of India (RBI) are set to introduce tougher norms for cooperative banks, which have come under scrutiny for alleged discrepancies and irregularities in the wake of the demonetisation drive. According to a recent report by the Income Tax Department, most banks have indulged in money laundering after the central government announced a ban on high denomination notes of Rs. 500 and Rs. 1,000 from midnight on November 8th. Many banks accepted and exchanged the old notes at a premium price and parked large deposits in multiple accounts, the report added. Furthermore, several accounts were opened without following the Know Your-Customer rule, the report points out. A senior government official said these banks could become conduits for black money in the future. At present, the control and supervision of these banks is not as rigorous as that of regulated commercial banks. “These banks need to be monitored as carefully as any other scheduled commercial bank has been used in the past for a large number of inappropriate activities and these may be used for the same purpose in the future,” said the official, who did not wanted to be identified. Demonetisation: Maintaining Credibility of Co-operative Banks With the move to demonetise Rs. The central government's 500 and 1000 rupee notes took a strange fall when cooperative banks, which are the backbone of the rural economy, were crippled with a ban on accepting the old currency which is now no longer legal tender. The operations of 370 District Central Cooperative Banks (DCCBs) and over 93,000 Primary Agricultural Credit Societies (PACS) have been severely affected by the restrictions imposed by the Reserve Bank of India (RBI) following the demonetisation of Rs. 500 and Rs. 1,000 banknotes. Addressing banks, the RBI says it has advised Urban Cooperative Banks through its Regional Offices and State Cooperative Banks through the National Bank for Agricultural and Rural Development (NABARD) of the need to ensure strict compliance with the instructions issued in connection with the exchange of certain banknotes as well as the deposit of such banknotes into the accounts of their customers. But there were reports that some cooperative banks were not strictly complying with the instructions issued in connection with the withdrawal of legal tender of the current Rs. 500 and Rs. 1000 banknotes (specified banknotes). Reserve Bank of India restrictions lead during bank demonetisation.