RBI’s confusion over ₹2,000 note withdrawal

The RBI notification asking people to deposit ₹2,000 notes by September 30, 2023, is also bizarre.

Its circular of May 19, 2023 gave four reasons for this: (a) it was issued to re-monetise after demonetisation (oxymoronic) (b) printing of these notes stopped in FY19 (c) its life-span was 4-5 years and (d) stock of banknotes in other denominations was adequate. To compound the confusion, it said that the withdrawn notes “will continue to be legal tender”.

Indians and Indian economy were paralysed for months following the overnight, unprepared demonetisation – despite warnings from former RBI Governor Raghuram Rajan, followed by a note from the RBI (as he wrote in 2017 book “I do what I do”). If it remains a legal tender why should it be withdrawn?

The big questions are: Legal or not, is the currency note issued by the RBI a safe and reliable tender? If yes, does it come with a pre-determined sell-by-date or is it completely arbitrary?

The poor may not have much of a choice but the rich billionaires do and they may opt for foreign currencies to keep their money safe. People’s trust in Indian legal tender has been broken twice in the past seven years (demonetisation of 2016 and now).

Was the RBI’s decision political?

Doubts arise because the demonetisation came just ahead of the Uttar Pradesh elections (February 2017) and it starved the opposition of cash; the number of candidates contesting this election fell by 30%. Four states with high stakes, Madhya Pradesh, Rajasthan, Chhattisgarh and Telangana, face elections later this year.

For the record, the RBI circular came five days after the BJP lost the Karnataka elections (counting on May 13, 2023).

RBI’s actions have been questionable of late. Here are two more examples.

Free pass to banking fraud and missing notes

On June 8, 2023, 10 days after RBI Governor Shaktikanta Das red flagged governance failures in SCBs and listed five “innovative ways” in which stressed assets (NPAs) were concealed and evergreened, the RBI gave a carte blanche to all banks and financial institutions to go for “compromise settlements” with accounts marked as “fraud and willful defaulter” (“Framework for Compromise Settlements and Technical Write-offs”).

It didn’t stop there.

It said banks and other financial institutions were free to give fresh loans to those very debtors after 12 months – which was banned earlier. The RBI didn’t explain why.

Those supporting the RBI may argue that this gives PSBs a level-playing field since private banks do it or that there should be separation of banks’ commercial activities (fresh loans to willful defaulters and fraudsters) from the criminal proceedings (which the RBI’s new framework leaves untouched).

But which fraudster and willful defaulter would like to pay back loans after tasting blood – compromise settlement means pay back next to nothing, no repayment (recovery) of the rest, fresh loans after 12 months and too slow judicial proceedings to act as deterrent (ask Vijay Mallya, Mehul Choksi, Nirav Modi and others who have fled the country and declared fugitives). Besides, most loan defaults involve PSBs – which are public depositories and mainstay of Indian banking/finance systems.

The magnitude of public money at stake with willful defaulters is ₹346,479 crore as on December 2022 – as the Transunion CIBIL, a credit information company registered with the RBI, has revealed. There are 16,044 willful defaulters – borrowers who have the ability to pay but don’t pay – with SCBs. This was a straight 41% jump from ₹245,767 crore in December 2020.

So, banks and financial institutions would now have to take heavy haircuts on ₹3.46 lakh crore again – after SCBs wrote off ₹12.3 lakh crore as NPAs in the past eight fiscals of FY15-FY22.

Fortune India explained why such “compromise settlements” is invitation to more banking frauds and willful defaults – which are on the rise in recent years and many such business tycoons have fled the country with bank loans. Many like the Sandesara brothers, fighting banking frauds (involving $1.7 billion) in India, are running flourishing oil business in Nigeria (fled India in 2019) and are also suspected to be doing business with public sector oil PSUs.

The second example is about missing ₹500 notes.

A national daily recently reported that the whereabouts of 1,760.65 million of ₹500 notes (both old and new ones designed post-demonetisation), valued at ₹88,032 crore, is not known. The report is based on the RTI replies from the three government mints – Bengaluru, Nasik and Dewas – and the RBI reports showing the notes it received during FY16 and FY17.

This mismatch may not actually amount to theft but what has caused disquiet is the RBI’s late-night response to it on June 17, 2023, which said: “These reports are based on erroneous interpretation of information collected under the Right to Information Act, 2005 from the printing presses. It may be noted that all banknotes supplied from printing presses to RBI are properly accounted for. It is further informed that there are robust systems in place for reconciliation of banknotes printed at the presses and supplied to RBI which include protocols to monitor production, storage and distribution of banknotes.”

This statement doesn’t explain (a) why or how the mismatch happened and (b) why is the report which relies on official records was “erroneous”.

A mere statement from the RBI assuring that “robust systems” exist isn’t enough. It is the credibility which is on the line for long, particularly because RBI’s robust systems (i) haven’t deterred PSBs to invent “innovative ways” to evergreening loans, as the RBI Governor recently found out (ii) it is giving a free pass or “revdi” to fraudsters and willful defaulters and (iii) its explanation for withdrawal of ₹2,000 notes lacks conviction.

Rs 2000 note

Are top banks getting their economics wrong?

₹2,000 note withdrawal ‘non-event’; favourable impact on liquidity: SBI