India Economy

The multiple leaks in our banking system

TCA Sharad Raghavan | Updated on January 11, 2018 Published on May 07, 2017

There is a raging market for old notes and the demand is reportedly coming from banks

The government’s demonetisation exercise, far from ridding the economy of black money, could actually be increasing the amount of unaccounted cash in the system in a very real way. The root cause for this is that, however well-intentioned an idea may be, it doesn’t stand a chance against the sheer corruption of the middle-manager. In this case, that would be the bank manager, both private and public sector.

During the demonetisation window of November 9-December 30, several reports emerged from across the country of touts and even bank managers exchanging old notes for new at a hefty discount — while some accounts put the discount at as high as 50 per cent, the average was about 30 per cent.

In other words, you gave the bank manager ₹1,000 in old notes and he gave you ₹700 in new notes and pocketed the difference.

This element of corruption on the part of the bank manager quickly became well known, and the authorities soon began making arrests. There’s no telling how much damage was already done by the time the demonetisation window ended.

But the harm inflicted by the bank managers didn’t end there. Insiders in the banking system and experts in the know are now talking about the market for old notes taking on a completely different light. Where old notes were sold for a discount, they are now apparently commanding a premium — to the tune of 30 per cent in Delhi and Mumbai, according to one banking expert.

So why would somebody pay a premium for notes that are now worthless, you might ask, especially if it is a criminal offence to hold more than 10 pieces of such notes? Well, going back to the very basics of economics, the answer lies in the principles of demand and supply. According to more than one account, there is a raging market for old notes and the demand is coming from banks.

Sketching the plot

The play-by-play leading up to this scenario, according to the officials, goes more or less like this: Just prior to the demonetisation window closing, bank managers across the country were visited by their buddies, family members, and sundry others with one sort of influence over them or another.

The request was simple: “State in your official records sent to the RBI that you received more deposits of old notes than you actually did. I’ll deposit the remaining amount soon, I just need a few more days to collect the cash from my various holdings. The RBI anyway isn’t going to verify these numbers till much later. The cash will be there by then, don’t worry!”

So, bank branches (mostly in Mumbai and Delhi, according to a banking official who didn’t want to be named) stated that they had received deposits they hadn’t, in the hope that they soon would. Many of those additional deposits never came, probably because the depositor found a cheaper way to exchange his notes. So, the banks were in a fix — they had told the RBI they had a certain amount of old notes deposited with them, but they actually had somewhat less than that amount. Hence the current premium being offered for demonetised currency. That’s the theory, at least.

Needless to say, it’s ridiculously hard to get a banker to provide hard proof of this.

So, due to the bank managers’ connivance with the holders of black money, banks could now very well be contributing directly to the amount of black money in the system.

After all, the premia for old notes are hardly likely to come with a receipt.

The Finance Ministry, being the parent Ministry of all things banking, should quickly look into this. Even rumours and hearsay suggesting something like this is happening is disturbing enough to warrant swift action.

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