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BRP Bhaskar: Banks rescued at cost of poor
January 03, 2017
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Exclusive to The Gulf Today

Was demonetisation of high-value currency notes, which inflicted much pain on honest citizens in the last days of 2016, intended to eliminate black money, as Prime Minister Narendra Modi claimed on November 8? If so, it was a colossal failure.

Notes of Rs 1,000 and Rs 500 worth more than Rs 14,000 billion were in circulation when they were demonetised. Out of this, the government expected about Rs 10,000 billion to come back. So it told the Supreme Court. The rest, it assumed, was black money and would go out of circulation.

By December 13, the Reserve Bank of India received demonetised notes worth Rs 12,440 billion and the deadline set for their surrender was still 17 days away. After that there has been no word from the RBI on the subject. Modi, who dwelt on the aftermath of demonetisation in an address to the nation on New Year’s eve, too avoided it.

Dashing the government’s fond hopes, smart criminals converted their black money into legal tender. Misuse of the Jan Dhan accounts which had come up under Modi’s scheme to give the poor access to banking services was one of the tactics they employed.

After demonetisation the number of Jan Dhan accounts went up from 255.1 million to 262.0 million. Deposits in these accounts swelled from Rs 456.37 billion on November 8 to Rs 746.09 billion on December 7 before falling to Rs 710.37 billion. The rise in deposits was 112 per cent in Karnataka and 111 per cent in Gujarat. Evidently crooks laundered black money using the poor as cover. The government has now ordered a scrutiny of the Jan Dhan accounts.

The demonetisation decision came immediately after the government received voluntary disclosure of concealed incomes to the tune of Rs 673.82 billion. It was followed by income-tax raids in several states in which Rs 30 billion in undisclosed incomes was detected. The cash seized included Rs 860 million in new notes issued since November 8.

Modi’s demonetisation differed from similar exercises undertaken by his predecessors. It amounted to virtual impounding of people’s money, at least for the time being, as there were severe curbs on withdrawals from bank accounts. Former Prime Minister Manmohan Singh called it organised loot.

With more money than anticipated coming in and withdrawals subject to restrictions, the commercial banks are flush with money. In his New Year’s eve speech, Modi said the situation represents a golden opportunity for the banking system. To understand the significance of that observation one has to look at the highly vulnerable state of government-owned banks.

The banking system has a large public sector created since Independence with the takeover of large private banks at different times. The largest one is the State Bank of India, created by nationalisation of the British-owned Imperial Bank of India in 1955. Seven banks of former princely states were made SBI’s associates in 1960. The 14 largest private banks of the time were nationalised in 1969. The next six big private banks were taken over in 1980.

Imprudent financial management under political influence endangered the health of most public sector banks during the past few years. RBI data shows that in the financial year ending March 2016, the country’s banks added Rs 4,400 billion of fresh non-performing assets (NPA), defined as “loans or advances of which principal or interest has been overdue for 90 days”. Public sector banks accounted for about 86 per cent of this – the SBI group 20 per cent, and others about 66 per cent.

Between 2006 and 2016, the public sector banks wrote off loans totaling Rs 2,510 billion. As on December 3, 2015, the commercial banks listed more than 7,000 account holders who together owed them Rs 7,054 billion as wilful defaulters.

According to information the government provided to Parliament, in June 2016 the top 20 NPA accounts of the public sector banks stood at Rs 1,450 billion. They urgently needed funds to tide over the situation. The Centre infused Rs 229.15 billion by way of capital into 13 of them last July. They wanted more.

There is reason to suspect that the government went ahead with demonetisation, overlooking its limitations as a measure against black money, to channelised funds into the floundering banking system. It certainly had a duty to rescue the banks but it was immoral to do it at the cost of the honest poor.
 
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