Banks are no longer be permitted to exchange older Rs 500 and Rs 1,000 notes over the counter for new ones. When he announced the demonetisation of higher-value notes on November 8, Prime Minister Narendra Modi had said that everyone would be able to exchange up only to Rs 4,000 in cash until November 24, after which the limit would be increased. Instead, on Friday, the finance ministry said it was ending cash exchanges altogether.

“It has been observed that over the counter exchange of the old currency notes of Rs. 500 and Rs. 1000 denomination has shown a declining trend,” the ministry said in a release. “Consequently, there will be no over the counter exchange of old Rs. 500 and Rs. 1000 notes after midnight of 24.11.2016.”

Those who still have older notes have the option of depositing this money in their bank accounts. Unless, that is, they don’t have bank accounts.

India’s unbanked

Because of India’s sheer scale, that is not a negligible number of people.

A report prepared by PricewaterhouseCoopers India in 2015 pointed out that India’s unbanked population that year was 233 million. This was half the number it was in 2011, at 557 million, primarily because of the Pradhan Mantri Jan Dhan Yojana scheme aimed at making it easier for people to open new accounts. Since that report, in October 2015, the Jan Dhan Yojana has grown even further, adding 68 million accounts as of the most recent report on November 9, 2016.

Presuming every single Jan Dhan Yojana account has gone to a new user, that still leaves about 165 million people unbanked. Allowing for the Jan Dhan’s aim of opening bank accounts for every household (of an average of four people), rather than individual, that brings this number to 41 million households.

If that entire unbanked population were a country, it would be the world’s eighth largest nation – more populous than even Bangladesh.

Surveys carried out by banks under the Jan Dhan Yojana in 2015 found that 99.99% of the 21 crore households they reached out to had opened bank accounts. The government and RBI have also made efforts to use other avenues to increase access to banking, such as giving licences to payment banks, allowing India’s Post Offices to be leveraged that way. Yet, despite this, the Centre acknowledged in June this year that 40% of the country is “outside the ambit of formal banking”.

Financial inclusion

The Finance Ministry’s press release did address this too. “It has further been felt that people may be encouraged and facilitated to deposit their old Rs. 500 and Rs 1,000 notes in their bank accounts,” it said, on Friday. “This will encourage people who are still unbanked, to open new bank accounts.”

It’s possible that some of those households that are unbanked were already able to exchange the cash that they had or can rely on informal networks to do so. But that still leaves potentially millions more who have to now open bank accounts – at a time when most banks are still struggling to deal with the massive rush.

Many of these will have trouble opening accounts even if they had the one identity card that had allowed them to exchange cash earlier, but no valid current or permanent address proof that a Jan Dhan account requires. Anecdotal evidence suggests that banks also don’t have the capacity to handle new account openings while they continue to deal with the massive pressure of people depositing older currency.

Banking pressure

Even if they do manage to open an account though, if the government continues to use these tactics to force people into using the banking system, it will put the already stretched industry under further strain. India has only 18 ATMs per 100,000 adults, compared to a global average of 43. It has only 13.4 bank branches per 100,000 adults, in line with the world average but far behind any country that can claim to be primarily cashless.

Business correspondents, the people whose job it is to do small banking transactions in areas where there are no branches, are already under strain as a result of the demonetisation. They are allowed to assist with opening of accounts, but the KYC formalities will nevertheless have to be done by branches.

India’s central bank, after notifying this new sudden change, did allow for some leeway.

  “The Reserve Bank of India advises members of public that exchange of banknotes in Rs 500 and Rs 1000 denominations, whose legal tender status has been withdrawn, will continue to be available at the counters of the Reserve Bank upto the current limits per person as hitherto. (However such exchange facility is no longer available at other banks’ counters).”  

If they want to, those 165 million Indians who haven’t been able to open an account can now go exchange their cash at RBI’s nationwide network of just 19 regional offices and nine sub-offices.