Few cooperative bank issuing DDs and pay order against cash mostly from politicians and opening back dated fixed deposit by old notes

A few cooperative banks, mostly in rural areas, have found a new way to bypass banking system norms put in place by the government to fight the black money menace. Since the demonetisation drive announced on November 8, these cooperative banks, which are yet to be computerised and still use physical ledger books, are taking cash from customers and opening backdated fixed deposits (FDs). They are also issuing demand drafts (DDs) and pay orders against cash, mostly from politicians.

People from the banking sector said that these entities were using a loophole, wherein the money against the DDs and pay orders issued by banks goes into a pool account, which is deemed to be the bank's. Since all banks are allowed to take cash from customers and exchange it with the new currency notes, these banks are helping people with unaccounted-for cash, who would otherwise be stuck with stacks of worthless papers that served as valid notes till November 8, bankers said.

The deal between these cooperative banks and people buying DDs and pay orders with cash is that they will not present these instruments to any other bank to encash. However, after March 31, the issuing cooperative bank will cancel the DDs and pay orders, and return cash to the holders of those instruments in the new notes.

Officials in the RBI are working to plug the loophole, which exists because these banks are not computerised, sources said.

As a first step, on Tuesday night, the central bank, through a press release, warned all cooperative banks to strictly adhere to its instructions for withdrawal of the new notes. The RBI has informed the urban (through its regional offices) and state cooperative banks (through NABARD) about "the need to ensure strict compliance with the instructions issued".