Banking, Uncategorized

ATMs and Demonetisation

With the Reserve Bank of India (RBI) restoring currency notes supply to banks to around 80-85% of pre-demonetisation levels, most if not all ATMs should have their normal supply of cash.  Agencies handling ATM replenishment have also by and large confirmed normal levels. Yet many ATMs still show inadequate levels, and where available, dispense only Rs. 2,000 notes. This obviously means people are withdrawing more than they need and many are hoarding notes of small denomination notes as a panic reaction to the previous temporary shortage.

Senior citizens are by nature wary about using debit or credit cards, ATMs or any other online modes of payment. They also hold a certain level of currency at home to meet unforeseen medical and other emergencies. However, they did this even prior to demonetisation so all they did is to deposit the banned notes they had with them and withdraw almost the same level of new notes. Overall this would not affect the stock of currency at ATMs.

What has therefore altered at least for the time being is behaviour of younger bank customers. For no apparent reason, many are reacting in panic and hoarding currency particularly in smaller denominations. Given that many have now started to rely almost entirely on cards and online payments, the demand for currency should by now have gone down considerably. This is also what the RBI has planned for, and therefore if withdrawal from ATMs remains more than needed, other customers, who as a result have to return empty-handed, get affected badly.

Prior to demonetisation, most smaller retail outlets like grocers, vegetable and fruit vendors, gas agencies, smaller hospital, pharmacies, laundries and many others dealt almost entirely in cash. After banks and the government introduced several alternatives, many of them have since shifted to accepting, wherever possible, cashless payments. However some others adamantly refuse to do this. Habitually most retail outlets, small and some larger ones too, rely on cash transactions to hide their actual turnover enabling them to pay less in taxes and levies like sales tax, VAT etc. Many customers have also become accustomed to getting better deals and more discounts if they agree not to insist on bills.  Retailers also tend to get better deals from their suppliers if they too deal in cash and do not insist on tax invoices. It is a cosy arrangement in which well-placed bribes to tax and excise officials get them to look the other way. The government ends up losing much needed revenue and they have been trying in various ways to get people to change their habits. Introducing cashless modes of payment is a step in that direction and it is heartening that some retailers and customer, both have fallen in line.

However we are still a long way off from reaching levels of compliance considered normal in advanced economies. Not that people in such advanced countries are doing this very voluntarily, there are just more checks and balances in their system because of more data being collected and analysed. In India too, data analysis is fast catching up. During the demonetisation exercise, many holders of unaccounted banned currencies resorted to several underhand methods to convert their ill-gotten gains. Aided actively by a set of corrupt bank officials, they used fake IDs, fake/shell company bank accounts, dormant accounts etc. to exchange their currency notes. They also got their employees, associates and hired help to put funds into their accounts and then withdraw new notes. These abnormal withdrawals are another reason for shortage of currency in ATMs. Government and RBI are well aware of these methods and with enhanced data analytical tools at their disposal tax authorities have gone after the black money holders as well as rotten bank officials. This is an ongoing process which will take some time as more than 18 lakh accounts are reportedly being investigated. For sure, many of these account-holders will have legitimate explanations, and these accounts will naturally be eliminated from the list in due course. However is widely expected that many others will be caught. In fact banks have taken action to suspend some officials already.

No one suggests that the steps taken so far will stop black money. While some black money holders will be caught in the ongoing process, many others will go free. The practice of bribery has not stopped and will continue at least for the present. Political spending all in black money has to be tackled and that in itself is a mammoth task. However a serious beginning has been made, and the anger in some quarters at steps taken so far does show that it has made quite a significant impact.

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