Two years after DeMo: Is government using demonetisation as a postdated cheque?

At least one sobering aspect that marked now two-year-old demonetisation through its hey days that brought long queues before banks was the fact that cheques were more easily honoured than what used to be the case before November 8, 2016 – the day when the huge decision regarding ‘Notebandi’ was announced in a nationwide telecast by none other than Prime Minister Narendra Modi.

The high denomination currency notes worth Rs 1,000 and Rs 500 were junked overnight and most bank accounts were swelling with cash deposited in the wake of this.

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Thus, the cheques issued on or before November 8, 2016 and awaiting clearance seldom bounced. It continued to be so in the days to come and applied to even to “cheques issued by untrustworthy or not-so-dependable parties” as per bankers and lawyers who write notices against bounced cheques under the Negotiable Instruments Act. This happened to be the case until the last stipulated day for depositing old currency bills, or till December 30, 2016, and even for some more time thereafter both in case of regular and postdated account payee, non-bearer, or crossed cheques.

The point is that banks were flushed with such huge deposits that most bankers felt like having been armed with a huge cheque, courtesy the Government’s step. This is how most bank staff, including their unions, did not mind working overtime to change old currency with the new and take deposits in current and savings accounts where old currency notes were pumped ceaselessly for about 50 days or so.

The turn of the year at that time from 2016 to 2017 made banks feel so rich that most of them thought to be carrying their businesses forward quite comfortably in the times to come despite the burden of bad loans from the past. They also looked forward to the Government to come up with safe lending schemes where the banks assistance and loans could suitably be utilised and returns were assured. Two years ago and in the first few months thereafter no banker could have visualised the possibility of any row between the Government and the Reserve Bank of India, despite the fierce criticism of demonetisation led by Opposition parties.

The bankers, indded, felt like what Union Finance Minster Arun Jaitley now claims that demonetisation was meant to help the “formalisation” of the economy by enhancing banking route for most monetary transactions. This, Jaitley said on Thursday in his Facebook post. Thus, the question that arises is: How did the demonetisation saga gave in to the kind of bitter differences between the Government and RBI that have tumbled out into the open now?

Although the answer to this question is as open as the tussle between the Government and the Central Bank informed bank hands point out to the indiscretion of the Government higher ups in the handling of the cash that became available to banks via the virtual mopping up done in the days of ‘Notebandi’. On conditions of anonymity, a banker said that given the cash flow to banks two years ago, the Government thought that it had stumbled upon a big postdated cheque that could never bounce back and can well be honoured as easily as has been the case with so many cheques that were with banks or came to them from customers during the demonetisation days.

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According to him, as the demonetisation drive got over the Government began servicing schemes like Startups and providing assistance under Mudra, or micro units development and refinance agency. It is a scheme meant to cater financial needs of self-employed persons carrying out little trades. Such assistance was extended often without checking the viability of projects so as to put a burden on banks and this may result in depleting banks resources, assets and reserves. To top this the Prime Minister came up the other day with a scheme for an assistance of up to Rs 1 crore to MSMEs, or micro, small and medium enterprises spread all over the country. All these schemes are going to put a stress on assets with banks.

Amid this, the Finance Ministry wants the Reserve Bank to transfer Rs 3.6 lakh crore out of its total reserves of Rs 9.6 lakh crore to mainly recapitalise public sector banks. So asking for over one-third of the Central Bank’s reserves indicates that everything is not right with the banks disbursing loan and assistance of myriad types to crores of people spread all over the country without sufficient guarantee and collaterals to ensure return.   

So the bankers are more worried than the political class in whose priorities an election year warrants more public money to come into play than what should normally be the case to ensure fiscal health of banks and other similar institutions.