Following the demonetisation on November 8, 2016, lot of opinions, debates and charges have been traded. While the regulators and bank employees have been struggling to provide exchange services to people standing in queues, policy makers have been analysing the consequences. With scarce stock of R100 denomination, and late arrival of new R500 notes, it is difficult for banks to assuage the need for small denomination currency.
The drop in the business level of small shopkeepers, vendors and neighbourhood stores is logical in the short run. But once the new currency is supplied in adequate measure and gets distributed, the normalcy will be restored. Demonetisation is intended to extinguish a substantial part of black money. Despite initial inconvenience, the policy is definitely in the larger interest of social well-being. Rightly so, the public is accepting discomfort and initial hitches in trade.
Due to the thrust on digital banking in the last few years and rise in number of ATMs/PoS terminals, bank customers have increasingly come to be in possession of more of high value currency (R500 and R1,000). The ATMs are normally aligned to dispense large value currency so that more number of customers could be served with its limited volume. As a result, low value currency of R100 and below has already been scarce in circulation. Customers were often held up with high value currency dispensed by ATMs and were needed to exchange them for low value currency in bank branches. Hence, in many parts of the country, the stock of money with the public is already built with high value currency. Digital banking environment does not support circulation of low value currency except in a limited measure. Such silent wallet transformation of digitising public may not have been adequately noticed in articulating the currency replacement policy.
In such scarce background of lower denomination currency, soon after demonetisation, people began to hold back low value currency as a treasure making it scarcer. Even those, having it have also went on a hoarding spree forming beeline in banks to get more. Abstaining from using the low value currency has created an alarming and artificial scarcity. People were not prepared to use the space of 50 days to exchange currency. The anxiety was to quickly surrender old currency for new currency. In such elevated scarcity and logistical constraints in moving cash to different geographies, many bank branches and ATMs, at times ran short of R100 currency adding to the woes. Lack of quick measures to align ATMs to the new currency added to the pandemonium. Moreover, even if exchange of cash took place, there was no immediate use of currency of R2,000 offered to meet vendor transactions of low value.
Demonetisation devolved following key responsibilities on banks: (i) Exchange of currency (ii) accepting deposits (iii) offering withdrawal of limited funds from existing deposit accounts and (iv) opening of new deposit accounts. Among other functions, banks have to undertake these immediate activities through over 1,34,000 bank branches and over 2,00,000 ATMs. Banks are also using their large network of its business correspondents (BCs) and mobile vans to reach out to the hinterland. Looking at the mammoth task, banks have redeployed staff from administrative offices to branches to provide the multiple services. It can be estimated that a billion people will avail currency exchange services in the next few days including customers and non-customers from banks and post offices, and banks have geared up well to meet the challenge.
The immediate impact is accretion of fresh deposits of R6 lakh crore. Such inflows of deposits will initially be in current and savings deposits accounts (CASA) which can bring down cost of funds in the short run. The increased use of digital banking is set to increase manifold. Additional PoS terminals are provided by banks to new merchant establishments. Lack of cash in the society will force increased use of e-mode that can eventually widen base of electronic banking. One of the key benefits of technology to reduce operational cost of banks has been eluding due to lack of economies of scale in the use of e–banking. It will now hasten the cost benefit. Efficiency in the internal usage of technology by staff will also improve. The surge in formal financial system due to increased monetisation of the economy will immensely benefit banks. Banks are, therefore, right in putting up with the pain for larger gain too soon.
With currency supply-side fast improving and ATMs getting aligned under the leadership of RBI, some of the earlier constraints in small trade due to shortage of change/lower denomination will also get automatically addressed. Thus, markets in future will be having abundant lower denomination notes of R20, R50 and R100 which were not readily available, as ATMs do not dispense such currency, in adequate measure. Analysed from all angles, in the milieu of demonetisation, the winners will be banks. Perhaps the benefits for banks will outpace efforts that they are making now, provided they use the opportunity to grow big and profitable.
By: K Srinivasa Rao
The author is associate professor, National Institute of Bank Management, Pune.
Views are personal