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1/27/2014 2005 currency cutoff: RBI move may check black money but its panic time
http://www.in.com/news/current-affairs/2005-currency-cutoff-rbi-move-may-check-black-money-but-its-panic-time-52256517-in-1.html 1/5
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You are Here New s Current Affairs 2005 Currency Cutoff: Rbi Move May Check Black Money But Its Panic Time
by firstpost last updated on January 24, 2014 at 9:08 am
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2005 CURRENCY CUTOFF: RBI MOVE MAYCHECK BLACK MONEY BUT ITS PANICTIME
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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.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
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1/27/2014 2005 currency cutoff: RBI move may check black money but its panic time
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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.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.
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1/27/2014 2005 currency cutoff: RBI move may check black money but its panic time
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