Govt goes back on its word—RBI puts riders to old notes deposits

The ordeal for the hapless citizens from the demonetisation exercise just doesn’t seem to end, and the Centre and the apex bank appear unrelenting in making it worse. Now there’s bad news for those who waited to deposit the old ₹500 and ₹1,000 notes that they had held with them, into their bank accounts. With around 11 days left for the deadline of December 30 for depositing old notes, the RBI on Monday suddenly introduced more obstacles to make it difficult to do so. It may be recalled that the government has already stopped the exchange of ₹500 and ₹1,000 notes at banks and post offices on November 25. Now, one may deposit only once an amount of old notes exceeding ₹5,000 till the deadline, and that comes with many riders and restrictions.

It may be noted that when the apex bank issued its circular on November 8 announcing the demonetisation, it had only said that “cash deposits machines / cash recyclers should continue to accept specified bank notes up to December 30, 2016”. That is, there were no riders attached.

In fact, with long serpentine queues forming in front of banks to exchange the old notes, the Finance Ministry had placed advertisements trying to placate the wary citizens. The advertisements clearly stated that one could deposit old notes in bank accounts till December 30, 2016 “without any limit”. Further, the advertisements said “deposits up to Rs ₹2.5 lakh” would “not be reported to the Income Tax department” and that there would be “no harassment or investigation”. That goalpost just changed.

The RBI’s new conditions go back on what was announced by the Finance Ministry soon after the demonetisation announcement by Prime Minister Narendra Modi on November 8.

RBI’s new conditions on deposit of ₹500 and ₹1,000 notes

The new conditions put forward by the RBI on December 19 are:

1) One can deposit specified bank notes (SBNs) in excess of ₹5,000 into a bank account only once during the remaining period till December 30, 2016. Not just that: the person will be questioned in the presence of at least two officials of the bank, as to why that amount could not be deposited earlier and the bank officials will have to be “satisfied with the explanation”. It is not clear what would happen if the explanation was not satisfactory. The explanation would be kept on record to facilitate an audit trail at a later stage. An appropriate flag also should be raised in the core banking solution (CBS) to that effect so that no more tenders are allowed.

2) There will be no problem—at least, as of now—when a person returns the old notes which has a value less than ₹5,000 across the bank counters in the normal course until December 30. However, if amounts less than ₹5,000 are deposited into one’s account multiple times and if they add up to more than ₹5000, then they may be subject to the procedure of that followed in case of tenders above ₹5000.

3) The bank account has to be fully KYC (Know Your Customer) complaint, if the full value of the old notes deposited has to be credited to one’s account. If the accounts are not KYC compliant, then the credits would be restricted up to ₹50,000 subject to conditions.

4) All the above restrictions, however, shall not apply if the deposits are for the Pradhan Mantri Garib Kalyan Yojana, 2016.

5) The person depositing the old notes will have to produce a valid proof of identity. However, supposing the old notes deposited has to be credited into a third party’s account, then specific authorisation by the third party should be presented to the bank, apart from the valid proof of identity of the person actually depositing the notes.

Why does the Government want to restrict old notes deposits?

The Centre well knows that on November 8, there would be plenty of cash held by individuals for various reasons from their legitimate earnings, and indeed reassured them that these earnings would remain safe, reflected in the no-questions-asked rule for deposits within ₹2.5 lakh. The new restrictions today raise a crucial question of why people are suddenly facing an unexpected and uphill task depositing even small amounts of legitimate earnings they held.

A big clue perhaps comes in a tweet this morning from CNBC-TV18, which quotes sources to say that about ₹14 lakh crore of the ₹15.4 lakh crore worth of currency notes demonetised on November 8, has already been deposited in banks so far.

The NDA government is perhaps worried that if most of the demonetised money does come back to the system, it would prove the contentions of several leading economists that very little black money in India is held in the form of cash. Thus there would be no ‘windfall’ of black money which the Government stood to gain, making the entire demonetisation exercise seem a flop in terms of extinguishing black money while posing an unnecessary burden on the people.

In fact, several commentators have pointed out that the changing dialogue on the aims of demonetisation by the Government, shifting the focus from tackling black money and terrorism to moving India towards a cashless economy, is a damage control exercise to camouflage the failure of demonetisation to tackle the black money scourge.

One can only wonder, once the newly-restricted window to deposit old notes ends 11 days from today, what the government will call small amounts of legitimate money earned by people and still held in old notes? Are these small cash holdings also going to be lumped as a ‘windfall’ of extinguished black money? If so, then much of this ‘windfall’ is going to be at the cost of legitimate savings of even many law-abiding citizens, including the poor.