2005 currency cutoff: RBI move may check black money but it's panic time

The latest announcement made by the RBI assuring the public not to panic on the withdrawal of currency notes issued prior to 2005, is bound to create panic. The reason is that once we are told that certain currency notes would soon be phased out, there would be a self-fulfilling panic where no one will accept such notes between today and April 1st thus leading to more pandemonium.

What could be the thinking behind this move? One reason could be that such notes are old and look different from the ones that came after 2005. If this be the case, this process can be kept open for a longer period of time.

Another one could be that there are too many such fake notes. But this is no solution as even the bank teller may not be able to distinguish these notes now and may not accept them to play safe. Also there could just as well be fake notes printed after 2005.

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Third, this is a useful way to check black money. The last sounds plausible but then it is being assumed that all black money or most of it was generated prior to 2005. In fact, more likely such money would have gone to non-black money generators and unfortunate holders through circulation.

Further, the black money holders can still get it converted at bank branches and working through agents could escape identification. Therefore, there does not seem to be a very convincing reason for this move given that we can start exchanging such notes freely from April 1st and complete such transactions before July 1st after which if we go to a bank where we do not have an account, we need to provide our credentials.

This last move would be extremely odious for people who do not have an identity card - migrant labour or those who live in unauthorized slums will not be able to provide such identification and are likely to be shunned by banks right away.

What are the implications? There are two perspectives here. The first is from the public and the other from banks. From the point of view of customers, this means a lot of harassment because we need to check whether or not we have such notes and keep them aside for exchange.

[caption id=“attachment_1354119” align=“alignleft” width=“380”] Normally money is kept at home for emergencies which could run up to Rs 5 lakh. If not used due to good health in the last 10 years, they will have to struggle to make a beeline for exchanging these notes which would not have been touched.
AFP[/caption]

This will mean standing in long queues and being sent away on grounds of banks having exhausted their stock of currency to return the next day. Anyone who has experienced going to any public office to have work done be it a ration card, or driving license or application forms needs to make at least 2 visits for work to be done. In fact the harassment one goes through to change torn notes is immense as most bank branches say they do not provide such a facility!

We may have to pay agents to do the conversion for us as they would have their connections with the bank clerk who will provide the same for a commission. Therefore, there is a lot of money to be earned through this business. The senior citizens in particular would have to watch out.

Normally money is kept at home for emergencies which could run up to Rs 5 lakh. If not used due to good health in the last 10 years, they will have to struggle to make a beeline for exchanging these notes which would not have been touched.

And finally, there would be time delays in every cash transaction as every retailer, petrol store or ticket vendor will check to see the date on the rear of the note before accepting these notes. For all purposes, from today onwards all such notes would have been demonetized by the payments system.

A curious factor is the rural economy, where banking has not quite penetrated the core. What happens to villagers who do not have a bank account and probably will not be aware of the fact that their notes will no longer be acceptable? Given the low levels of literacy and awareness in these regions where cash is stored at homes, there could be serious issues going ahead.

A major fear for a holder of large amounts would be identification. While anonymous exchange will be the order to begin with, cameras can still catch the person and the trail can be sent to the IT department. Therefore, it would make sense for the holders to switch to gold (which may be difficult) or real estate where transactions are anyway in black. One needs to wait and see how property prices behave in the next few months. But certainly this industry may see a boom.

How about banks? At the operational level, the question to be asked is whether or not our banks are prepared to face this challenge? Banks need to stock up fresh currency to exchange old notes and have to deploy additional staff for this purpose.

Besides use of office space and time, in rural areas the challenge will be to get fresh notes especially so since these branches would be small and not handling such amounts, while the demand would be coming from also non-account holders. It is but natural that there would be several complaints to the RBI on non-availability of notes to customers or bank personnel simply driving them away. Has the RBI thought of this?

In fact, curiously, when the RBI decided to move over to the new form of cheque books, it has taken almost 9 months to have it in place. And a large number of banks are still not able to provide adequate cheque books and have issued thinner versions of 10 leaves as there is very high demand.

And this holds only for account holders and in case of currency exchange we are talking of any person walking in and asking for fresh currency. The RBI in the past too has not been able to gauge the demand for coins leading to shortages.

Hopefully from its side, it should be better prepared by having an account of how much of such currency is in circulation, though the exact locations will still be a mystery that can unsettle the system.

This entire exercise will be a mammoth one. The RBI should probably explain why this is being done and should ensure that everyone has access to such windows. A period of three month is too short a time and will create long queues and confusion as the masses flock to banks spending a horrendous amount of man hours for this process.

Agents are bound to come in and take advantage and their nexus with bankers will create a good parallel business for them. The cost would be high, but given that it is the central bank bearing the burden, can be absorbed. But what about the cost incurred by the public for no fault except holding on to currency which they thought was legal tender?

The author is Chief Economist, CARE Ratings. Views are personal.