The pain of demonetization is in full swing. The hardships to both tax payers and non-tax payers is real. Indians have borne it with a stoic acceptance that the system is being cleaned of black money. Unfortunately, the system is taking the stoic quiet as an acceptance of their continued inefficiency.
If so many people can bear the hardship for so long, do you think public sentiment will not change towards the system? The banking system in particular, which is wholly responsible for the mess in demonetization. Banks have lost touch with reality of branch banking. Over the last few decades both public and private sector banks went for an ATM expansion. Then they followed it up with a digital approach to customer service. As a result, banks, be it State Bank of India or ICICI bank, cannot service their customers through branches anymore.
This is the sad reality of banking today, and it needs to be realised by all stakeholders of banks -- shareholders, independent directors, customers and Reserve Bank of India (RBI). A shock therapy is needed for the banking system too, if they have to be prepared for the future. This is something that RBI has to do, but is the new Governor ready for it? The last two weeks have shown that he is grossly under-prepared for any task that requires quick decision-making. He is inadequately prepared for surprises.
The shoddiness with which demonetization has been executed should have been the responsibility of the RBI governor. Instead, overzealous and over enthusiastic mandarins are taking the blame. Their misplaced enthusiasm in trying to direct a situation does not help. It just shows the bureaucracy in a poor light. Once the decision is taken, it should be up to the banking system to execute. Why are mandarins taking tactical decision? Maybe, the euphoria of being in public eye has prevented them from seeing the reality.
The execution is a systemic problem, which has several variables. Like consumer behaviour when you scrap currency where all trust resides -- crowd behaviour in dealing with the process at the counters. The size of transaction and their impact on retailing, agriculture, commerce, savings and asset allocations. The variance of these transactions across different consumer class-based on their geography and income levels.
If the variables of demonetization are so diverse across the country can they be centrally controlled and planned. The bureaucracy in spite of the repeated failures over the last few days, still believes so. The distributed system approach does not occur to any bureaucrat, schooled in a command and control system. They think in terms of notifications, and orders issued. Imagine the plethora of orders that need to be issued if all variables have to be covered. This is why the banking system has failed. Will someone step up and acknowledge it from banking system. Head of banks continue to sing hosannas of what they are doing to correct course.
The decision to bring demonetization was sudden due to the secrecy, but it is two weeks now. The system is still not able to cope with it. Therefore, responsibility has to be clearly assigned. It is also important that economic impact of the decision is understood by the banking system.
Bankers, both public and private, have always taken the easy route when it comes to retail consumers. Retail consumers are always given the short end of the stick. Which is why a personal loan still rule at 12.5 percent while overdraft for companies are 250 to 300 basis points less. Automobile loans from banks still demand a premium when large auto makers give interest free loans. Corporate loans are the first priority for any bank because of the ease with which they can disburse a large chunk of their responsibility. In opening ATMs and digital banking they have not really thought about retail consumers but tried to cut the cost of their delivery of services as much as possible.
An ATM cuts the cost of a branch, moving customers to internet banking, reduces the number of branch personnel needed. All this in the name of cost rationalisation. The response of digital wallet companies to demonetization shows that bankers have been really penny wise and pound foolish. Their Achilles heel is showing. The problem is bigger as the economy slows down in the next two quarters.
The storm is on the way. Transactions will slow down because of drop in discretionary spending across multiple sectors and bankers will be asked to pump it up. It is a big decision that the government will take, sooner the better. The question is: Will the RBI governor be able to make the banking sector deliver it? If he is not ready for it or if the system is not ready, the delicate growth momentum will tank. This in an environment of slowdown in China, expected Fed rate cut in US and the fall in Indian stock market. In the long run, demonetisation may be good but the loss in growth momentum will be disastrous.
Alan Greenspan, the Federal Governor, lauded as the most important financial mind, said in 1999, on the fed’s operation of the monetary policy, “The bottom line is we really do not know how this system works.” It looks as if the Indian Economy is heading for a period where either Governor Patel knows how to work the system or he fails to move it.
The stock market typically discounts the economy six months in advance. It is at this stage of discounting it downwards. The belief in the banking system to give push start to the stagger in the economy is low. Therefore, either Patel steps up to the crease to bat or the government needs to find somebody who can.
(The author is a policy commentator based in New Delhi, He tweets @yatishrajawat)