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Dying Notes

Leading public sector banks are deciding against disbursing Rs 2,000 notes, but the RBI is maintaining a studied silence

THREE YEARS after India launched a unique demonetisation/gradual remonetisation scheme in November 2016, we seem to be at the cusp of another unnerving experiment.

Some leading public sector banks in the country have decided against disbursing Rs 2,000 denomination currency notes through their ATMs and cash recyclers (cash deposit machines or bulk note acceptors). They have also decided to recalibrate the currency cassettes of Rs 2,000 notes in their ATMs and cash recyclers, one more time, in order to load low-value denomination notes.

As the whole exercise stoked rumours of a fresh round of demonetisation, the banking regulator, the Reserve Bank of India, has maintained a studied silence.

The Houdini’s Act of the relatively new currency note soaked in perky magenta is certainly baffling. It is not yet clear if the central bank is planning to reprint the Rs 2,000 notes with improved security features after phasing out the current bunch of notes that, as reports suggest, is easily counterfeited.

While a few banks have stopped disbursing Rs 2,000 notes, some private banks are still disbursing them, albeit in small numbers. “Some PSU banks have stopped disbursing them completely, and are now returning soiled notes, collected in cash deposit transactions, to the RBI,” a senior banker told Newslaundry, on the condition of anonymity.

In an internal circular dated February 17, the state-owned Indian Bank said it has decided to disable the disbursal of Rs 2,000 notes through its ATMs and cash recyclers with immediate effect. The bank’s digital banking division said customers are “inconvenienced” since they are unable to exchange the high-value denomination notes in retail outlets.

“Hence they are coming to branches to exchange the Rs 2,000 denomination notes withdrawn from ATMs, with low-value denomination notes,” says the circular, which Newslaundry accessed. “It is defeating the very purpose of migrating the customers to alternate delivery channels.”

Indian Bank clarified that the cash recyclers will, however, continue to accept Rs 2,000 notes from customers during deposit transactions. “In case notes are left out in the Rs 2,000 denomination currency cassettes after March 1, 2020, branches will unload the notes by performing ‘decrease cash transaction’ as detailed in Section 3.3 of the standard operating procedure for implementing the online account of ATM/BNA cash operations.”

The bank has also decided to recalibrate the currency cassettes of Rs 2,000 notes in order to load Rs 200 notes. A few other PSU banks have already recalibrated their ATMs to weed out the Rs 2,000 denomination notes as well.

On its part, the RBI does not seem to have handled the issue with the transparency that a regulator of the central bank’s stature ought to have given to such a sensitive issue that involves millions of bank customers. What is baffling is the absence of any directive or statement from the RBI. Banking experts point out that Indian Bank is unlikely to have issued such a detailed circular without the central bank’s nod.

On the flip side, banks are on the prowl to identify illegal cash hoarders while customers try to exchange their pile of high-value currency notes for smaller denomination notes. “As of now, banks are keeping a close watch on customers converting more than a crore of rupees held in Rs 2,000 notes,” a banker told Newslaundry. “There are standing instructions to keep the RBI in the loop as and when suspicious cash deposits that do not match the customer’s profile take place at any branch.”

Will the move to squeeze out Rs 2,000 notes strangulate currency sharks in the money market? Having burned their fingers in 2016, most cash hoarders have learned the hard way to spread their wings over several investment options, rather than putting all their eggs in one basket. On the other hand, the government can ill-afford to take another drastic step like 2016’s demonetisation again, as the economy continues to be in the doldrums.

The Rs 2,000 note debuted soon after the demonetisation of Rs 1,000 and Rs 500 currency notes in November 2016. At the time, it was viewed as a retrograde step that defeated the primary objective of flushing out money hoarders. Since the government and the RBI spent thousands of crores of money on printing and distributing the new Rs 2,000 notes, any move to suck them out of circulation will surely kick up a storm.

A rough estimate said the central bank spent about Rs 21,000 crore in handling the mechanics of demonetisation, including the printing and distribution of notes. This had shrunk the RBI’s profits and resulted in less dividend being paid to the government.

In October 2019, the RBI issued a terse statement saying these are rumours. But the recent moves by PSU banks — coupled with the absence of Rs 2,000 notes in most ATMs across the country — has once again brought the issue to the centre-stage.

The minister of state for finance, Anurag Thakur, might have clarified in December that the government has no plans to withdraw Rs 2,000 notes, but this hasn’t pacified curious customers. They continue to throng branches and cash recyclers to exchange notes.

The RBI’s annual report, unveiled in August 2019, said the Rs 2,000 notes in circulation had shrunk both in terms of value and volume during last financial year. The total number fell to 3,291 million pieces in 2018-19, accounting for 31.2 percent in value terms of the total money in circulation, and three percent in volume terms. This was a drop from 3,363 million such notes in circulation at the end of March 2018, which accounted for 37.3 percent of the total currency in circulation in terms of value, and 3.3 percent in terms of volume.

The drop in the value of Rs 2,000 notes in circulation is in stark contrast to the surge in the total value of currency notes in circulation. While the figure stood at Rs 17,74,187 crore as of November 4, 2016, just before the government’s decision to demonetise Rs 1,000 and Rs 500 notes, it jumped to Rs 21.71 lakh crore as of April 12, 2019, the RBI report said.

In October 2019, The New Indian Express reported on the RBI’s response to an RTI query, revealing that the fresh printing of Rs 2,000 currency notes had been stopped. This was revealed after numbers showed that the central bank had printed fewer Rs 2,000 notes in the last three years. The numbers dropped from 3,542.991 million notes in 2016-17, to 111.507 million notes in 2017-18, to 46.69 million notes in 2018-19.

The RBI added that not a single Rs 2,000 note was printed in the current financial year.

Interestingly, Subhash Chandra Garg, the former economic affairs secretary, denied the news in January 2019. Garg, whose tenure in the finance ministry ended ceremoniously in November 2019, tweeted: “Printing of notes is planned as per the projected requirement. We have more than adequate notes of Rs 2,000 in the system with over 35% of notes by value in circulation being of Rs 2,000.”

While money hoarders reportedly favour using Rs 2,000 notes for their sheer convenience, the National Investigation Agency claimed last year that “high quality” fake currency notes have “resurfaced” — putting India’s economy in peril.

Given this back and forth, it will be interesting to see if banks fill the vacuum produced by their decision to stop disbursing Rs 2,000 notes by enhancing the supply of other lower-denomination currency notes. It will be catastrophic for India’s economy if we have to go through the agony of demonetisation again — when ATMs and branches ran out of cash, eventually bringing several businesses to their knees.

www.newslaundry.com