Demonetisation of High Denomination Currency Notes and its fall out

In an attempt to curb circulation of black money and counterfeit notes being used to fund illegal activities like terrorism, government and RBI have issued guidelines declaring that Rs 500 and 1000 notes will no longer be accepted as legal tender from midnight of 8th November, 2016. Here are some views from one of our esteemed readers on the current situation:

1. Ill timed move

I wholeheartedly welcome and support the demonetization of high denomination currency notes by the present government at the centre. Nevertheless, choosing the night of 8th November, 2016 was totally a wrong decision. In the first 10 days of any calendar month, there will be salary and other payments and a large number of cash withdrawals. Besides, settlement of petty debts and payment of interest also take place in this period. Therefore, the government should have chosen the night of 11th November instead, to cause minimum inconvenience to the common man. Since 12th and 13th are bank holidays for Second Saturday and Sunday, these two days could have been effectively utilized for transportation of fresh currency notes and filling up of ATMs, with 100 Rupee notes

2. Printing of 100 Rupees and 50 Rupees Currency Notes

As if in the normal course, RBI must have started printing 100 and 50 Rupee notes at least 2 months ago, in large volumes. However, if somebody raises a question, the stock reply from RBI must have been "Additional volumes of currency notes are printed, in order to bridge the wide gap between demand and supply".

3. Minting of 50 Rupee coins

Government should also have taken steps to mint and distribute 50 Rupee coins in the meantime. This would have eased the situation to some extent, in the aftermath of demonetization of 1,000 and 500 Rupee notes.

4. Convening meeting of CEOs of all scheduled commercial banks

After the demonetization move was announced, the RBI Governor and Finance Minister must have convened a meeting of CEOs of all scheduled commercial banks the next day (Nov. 9) to tackle the situation and to discuss further measures needed to make the demonetization hassle free and successful in the short run and the long run.

5. Restricting and Rationing withdrawal through ATMs and at the bank counters

As was done this time, banks must have been advised to impose curbs on cash withdrawals through ATMs and across the counters in the banks. So, in this matter, the decision of the government and RBI is right and I fully support it.

6. Exchanging old currency notes at bank counters

Exchange of old currency notes up to Rs.5,000 per account per week must be permitted. For this, name of the person, his/her Date of Birth, Bank Account Number and Identity Proof Number must be the basis. If any two of these records match, exchange of notes by the persons concerned may be denied without hesitation.

7. Hiring of retired staff members by individual banks

Banks must have been advised to engage the services of retired personnel aged below 65 years to handle this additional but monumental task. Such persons may be paid decent honorarium ranging from Rs.500 to Rs.2,000 depending on the type of job entrusted to them. Though some banks did resort to this step, many banks shied away from hiring them.

8. Filling ATMs with 100 Rupee Notes until supply position becomes normal

RBI must have planned and made elaborate arrangements to distribute 100 Rupee notes to banks through its own network of offices and through currency chests of various banks to all scheduled commercial banks and co-operative banks, basing on their average daily payments which can be found out with the last one month statistics in this connection. Any bank found furnishing wrong and exaggerated figures to RBI in this regard must be levied a hefty penalty.

9. Planning and organizing logistics and transport of currency notes

All banks shall have organized their logistics and transportation of currency notes meticulously and implemented them with near perfection. Any bottlenecks and hurdles must be removed immediately. For this, alternate and contingency plans must have been in place.

10. Distribution of lower denomination notes across the counters

Banks must also have stocked sufficient cash in lower denomination (Rs.100 and Rs.50), for distribution at the bank counters. This requires co-ordinated efforts of RBI, Controlling Offices of respective banks, their Currency Chests and Branches. If any bank branch does not have their currency chest within 200 Kms distance, they must have been permitted to draw cash from the nearby Currency Chest of SBI or any other nationalized bank. RBI should have issued very clear directives to all banks in this matter.

11. Recalibration of all ATMs in India

In the meantime, all banks must have started recalibration of all their ATMs so as to handle fresh currency notes in the denomination of Rs.500 and Rs.2,000, as their dimensions (length, breadth and thickness) vary. However, it is premature to estimate the cost of this recalibration exercise right now. It is also not known if the Government of India will reimburse the cost of the recalibration either fully or in part to the banks concerned.

12. Phased relaxation of restrictions

Government of India must have taken all the necessary steps to complete the whole process within 4 weeks/30 days. After every week, the restrictions placed on withdrawal of notes must be relaxed in a phased manner. To illustrate, in the second week, the customers may be allowed to withdraw Rs.5,000 from ATMs and Rs.20,000 from their banks. In the third week, this limit may be further raised to Rs.10,000 and Rs.30,000 respectively. In the 4th week, the limits may be increased to Rs.20,000 and Rs.50,000 respectively. However, the cap on exchange of old currency notes may be kept constant at Rs.10,000 during the second, third and fourth weeks.

13. Integration of software through RBI network

If possible, GOI may design and introduce suitable software to integrate all banks’ software for this purpose. There must be filters to detect and identify the persons who have exchanged and/or withdrawn huge amount of cash using multiple customer IDs or multiple proofs of Identity. But, I know it’s a challenging and cost prohibitive job.

14. Limits on transfers and remittances

Limits must be fixed on account transfers and online remittances through internet and mobile banking and RTGS and NEFT. This limit may be arrived at by finding the credits summation in the individual accounts for the 6 months preceding 08.11.2016.

15. Waiving service charges on transactions done through alternate banking channels and service tax on all online transactions including RTGS, NEFT, IMPS, Credit Cards, Debit Cards etc.

GOI must advise all banks in India to waive service charges and service tax on all remittances up to Rs.20,000 per transaction and Rs.50,000 in aggregate for the 4 weeks period. Similarly, all banks must waive ATM usage charges for other bank customers.

16. Roping in all central government and state government departments and institutions and PSUs

Income Tax department and State Police and Revenue Departments must be involved in the whole exercise to ensure its success and to prevent misuse and theft. Apart from all government departments and institutions, LIC of India and other PSUs must be instructed to accept old currency notes until further notice.

17. Curbs on ‘No Frills’ Accounts and Dormant Accounts

A large number of poor people with very limited means like vegetable/fruit/flower sellers, newspaper and milk vendors, watchmen, auto drivers, servant maids, members of Self Help Groups, housewives and even beggars have been hired by groups having huge black money to exchange cash at banks. These people are paid attractive commission ranging from Rs.100 to Rs.400. The only pre-requisite is, they must have their own proof of identity. Besides, money is transferred to PMJDY/’No Frills’ accounts and dormant accounts and the account holders are made to withdraw money from their account for similar brokerage/commission. To have a check on such malpractices, banks must impose curbs on cash withdrawals from these accounts. The total amount that can be withdrawn must be equal to the amount deposited in each of these accounts during the 3 months that preceded 08.11.2016. However, fully KYC compliant accounts with good average balances are exempt from this additional restriction.

18. Action to be taken on detection of fake notes

If 3 or more fake notes are detected in one single remittance, the person who deposited such cash must be handed over to the police without any second thought. All banks must issue suitable directions to their branches in this connection.

19. Suspicious Transactions Report

As per KYC & PML laws in force, any suspicious transactions must be reported to FIU, New Delhi through the Head Office of the banks concerned, at the end of every day or by the following day. So, the branch heads of all banks must monitor all cash transactions carefully and report the such suspicious transactions to their H.O. for further action deemed necessary.

20. Future curbs on high denomination notes

In future, the printing of high denomination currency notes especially Rs.2,000 must be kept under check and constant surveillance. The security features of such notes must be strengthened at regular intervals. At the banks also, there must be some penalty on remitting and withdrawing huge cash say, beyond Rs.1 lakh per day for Savings Bank accounts and Rs.5 lakhs per day for Current accounts. Further, there must be a monthly ceiling of Rs.3 lakhs and Rs.10 lakhs for SB and CD accounts respectively.

21. Others

Government must declare that all cash transactions outside banks beyond Rs.50,000 as ‘Null and Void’ and hence legally not enforceable. The first hit will be Real Estate sector and Film Industry. Anyone found violating this will be punished suitably, depending on the amount involved. A series of interconnected transactions shall also fall within this limit. So, all salary payments, purchase and sale transactions, payments for contract works, professional fees, service charges, remittance of statutory levies, duties and taxes etc. cannot exceed Rs.50,000, if payment for them is made in hard cash. This limit may be brought down further in due course.

We would also like to hear from our readers on their experience and opinion on the issue. Please comment below your thoughts on the issue.