Digital Economy like Demonetisation is Bound to Fail

Newsclick spoke to Thomas Franco, senior Vice President of All India Bank Officers Confederation, on demonetisation and its effect on the economy. He talked about the impact of demonetization on the recovery of NPAs by the public sector banks. As far as forming a cashless society is concerned, he feels that India does not have the infrastructure for it. There is an inadequacy of legal infrastructure; security as well as technology. The dark, dense cloud of demonetisation doesn’t seem to have a silver lining.

Pranjal: It is close to 1 month since banks stopped exchanging the old currency. But so far, RBI has not released any figures, though we hear in the news that 97% of the money has actually come back. Can you give your views on this? Why has the RBI stopped releasing data? What is it afraid of?

Franco: RBI has all the data and it is a misinformation that Urjit Patel has to verify data and has to check the actual cash. Presently, RBI is aware of what is the existing data because every currency chest is sending an electronic feedback to the government daily. They can get the figures easily. They are probably not sharing the data because it has gone against what they anticipated. Initially, they said that around Rs.3.5 lakh crores is not likely to come back and that it will be profit to RBI which they can then transfer to the government of India. They were also talking about handing over Rupees Ten Thousand to Fifteen Thousand to the Jan Dhan Account. No such thing has happened. Now they are in a dilemma. Economic Affairs Secretary says that their data may not be correct. SBI Chairman also says that the data may not be correct, that there may be fifteen percent variation. So now they are not in a position to give the actual figure, though they know that the data is available with them. They are just not sharing.

Pranjal: During the 2 months of demonetization, the newspapers were carrying news of people getting caught with crores of new currency notes. But police who were investigating these cases were unable to trace it, where has this money come from, (from which banks). What is the reason? Can’t the money be traced to a particular bank, based on the number on the notes?

Franco: One of the demand of the All India Bank Officers Confederation, to the Reserve Bank, from the day the printing started is to share their data. What were the denominations? What were the number of currency? To which bank and which state were the currencies given? We asked them to share that data on a daily basis. Once that data is available, the CBI or the state police can catch hold of the fraudsters, they would be able to cross check the source of such money. Today, within the banking system, it is possible to trace which branch has issued which currency. The RBI has to share the data, which it has not done. Here is a very serious issue which P. Chidambaram raised. He made a statement in the press that we have doubts that currency might have gone from the currency printing press directly to a few individuals. It is the Reserve Bank's responsibility or the Finance Minister's responsibility to counter that statement. Why are they not doing so? And why are they still not sharing the data? We also asked them why the private banks were being favoured, and are given more currency. They have not even replied to that. Press is also trying. RTIs have been filed, they are refusing to answer them. It looks like something has clearly gone wrong. The RBI and the government has to come out with a white paper. They need to explain to people of this country what exactly happened after the decision of demonetisation was taken. What exactly has happened. How much was paid? What was the process of the same? and where has that money reached? They have all the data and they should share it.

Pranjal: We have been told by many, that 3 to 4 lakh crores of black money will not come back into the banks after demonetisation, and the government will be able to spend this money on welfare. What is the truth behind this speculation?

Franco: Yes. The government’s anticipation was that a lot of people would not be able to exchange their money. That money would then remain with them once the government announces (through an act that the money not valid) that money can be accounted to the Reserve Bank of India. RBI has printed that currency, which has not come back, so then it becomes their profit. But, what in turn happened, is that the people found alternative ways. For instance, we know that agriculture income is not taxable. So, put the money in an account and get a Chartered Accountant to say that this was an agricultural income. Every rich person has some agriculture land or estate as his escape. People at village level who had some one to two lakh or even a few lakhs, were using their friends, relatives, dependents to deposit the money in their accounts. They were told that you don't have to pay me immediately and you don't have to pay interest. One proof is the agricultural loans, which banks give, have come down drastically. This should not happen in a month's time. We found out that many people who had extra cash told the needy ones to borrow money from them interest free. Thus, they said, both the parties shall benefit. Government’s calculation and the anticipation that people will be able to exchange, has been proved wrong.

Pranjal: There were also statements made in the press, that the rush of deposits into the banking system will improve the balance sheets and capital composition of the banks. Can you comment on this.

Franco: That is a very wrong assessment. Firstly, a deposit coming to the bank is not an asset it's a liability to the bank. Secondly, it cannot generate any additional capital because unless you lend that money, make profit out of it and run that profit to the capital account, it is not accounted as capital. In the banking sector, for that last few years there has not been much growth in the off take of credit because of the NPA (Non Performing Assets) problem. People are reluctant to lend, they are afraid it might lead to a NPA and that NPA can put them in trouble. The banks have currency, which they don't know how long will stay. Now they say that by February end this limit of 24,000 will be removed. Only after that will we know how much of the money will remain. If we take it into account that ten percent or fifteen percent stays back,that has to be lent and then only can youmake an income. Otherwise, you have to pay a minimum of four percent interest on the savings rate to all those depositors.

The government feels that even the interest rate for the banking system  has been kept without investment. Some amount has been invested in the bond market, government treasuries etc. They give a small percentage on return. So, the banks are splashed with funds which they are unable to lend. So they wanted interest rates to be reduced . But the government's policy is that over a period of time the banks reduce the interest rates, like some foreign countries there is zero percent interest. They want to move towards benefiting only the rich. Unfortunately, in a country like ours, the large portion of deposits is from the small depositors. It is not from the corporates. It is not from the rich firms. The major portion (more than 80%) is from small household savings. These savings are deposited with a to get an assured rate. Take the example of pensioners, they have deposited all their benefits with a hope that to get ten percent – eleven percent that they can use on a monthly basis. But now they are praying.  The interest rate for fixed deposit which was 11%  three years ago, has come down to 7%, 7.5%. Such people are quite badly affected. Who is going to benefit? Naturally, when the deposit rate is lowered, the advance rate is also squared. So, the corporates will get loans at a cheaper rate. That is not good for the country. It is going to affect the masses of the country.

Pranjal: What has been the impact of demonetization on the recovery of NPAs by the public-sector banks? How much of the NPAs belong to corporates and how much from agriculture (farmers)?

Franco: To some extent demonetisation has had an impact on the recovery of NPAs. There were people who had money, who were willful defaulters, not paying back or withholding, thinking that they would pay after sometime. Some of them have brought money into their accounts and some of those accounts have been regularized. But it is not an amount huge enough to have an impact on larger NPA. The larger NPA scene is now becoming worse, because while from one side some NPA came in, from another side the government said that you can defer your payment for two months and another one month for agriculture. So even the people who were paying, stopped paying. Therefore, the amount of NPA is increasing. The larger NPA (almost 86%) is in the SME sector which is even for the larger firm. That has not created major impact because those people know how to handle their accounts. Nothing is going to happen to Corporate accounts and trusts accounts. Most of the trusts are registered as charitable trusts. So, there is no income tax to be paid. For Corporates, it is only based on the accounts which they submit. So, whatever money they have also would have flowed into accounts and they will take it back. That cannot be traced even by income tax department because Chartered Accountants are there to give them the accounts.

Pranjal: Do you think, demonetization will stop the flow of black money, once and for all? Will it make people shift to bank and online transactions, instead of cash?

Franco: Two things: One, this government on account said that they will bring back black money which they could not. They have to now show to the people that they are taking tough measures. Majority of the population is against corruption and black money. People think that while they are suffering, the corrupt people are enjoying. There was an attempt to show to the world that the Modi government is strict with the corporates; that they are strictly against the black money holders and against corruption. But unfortunately, they could not succeed in selling that idea. Today, it has come to the light that not much of the black money has come back to the system. Fake currency has not come back, corruption has not stopped. The root of corruption starts with the bureaucracy and the legislature (where the political parties have large funding) and the corporates. There is enough literature to show this. Books like ‘Ambani and Sons’, ‘The Polyester Prince’, ‘A Feast for Vultures’ point to the root of corruption and how the corporates are controlling the policies of the government. So, unless you change the current policies and really look for a policy that serves the larger majority, all other things are temporary measures and in this case, they have failed.

Secondly, now they have changed the goal post and have started talking about the cashless economy. That again is going to benefit the corporates who have been supporting the government. In one of the Economic Summits, a question was posed to Sunil Mittal that, “You all corporates supported this government with an expectation that they are going to take care of you, they are going to change the policies. What is your assessment?” He said, that yes, they are! So, it is the corporates who are getting benefited. This has still not been brought to the notice of the people at large. But eventually people will also get to know.

Pranjal: Who will benefit from cashless transactions? Do you thing that India has an Infrastructure to support cashless economy?

Franco: At present, we do not have adequate infrastructure. The legal infrastructure is inadequate; security and technology is inadequate; electricity is inadequate and connectivity is inadequate. With all these inadequacies, cashless economy is not going to succeed to a great extent. Yes, there will be an increase in post transaction, there will be increase in PayTM transactions. But what about the larger majority? People in the villages where there is no connectivity, how do you think they are going to get benefitted. They (people in rural areas) are going to be sufferers with the government thrusting cashlessness. Similarly, there are many people who had that money but could not exchange. I have come across many people, especially women who approached me saying that they had Rupees ten to fifteen thousand that they were saving it in their homes away from their husbands. They were not aware of the changes in the rules for exchanging old currency. Now, they want to exchange it. Now, the Reserve Bank says that the money cannot be exchanged unless the person was out of the country or unless he/she is an NRI. This is again a problem. Unless the government provides sufficient education to a larger majority, the problem with digitalization will not end.