Opinion

Flawed and fickle: RBI’s frequent changes to cash withdrawal rules fuel prevailing uncertainty

Demonetisation policy underlines the problem with central planning as intrusive policy leads to the authorities tying themselves into knots.

After the demonetisation exercise announced on November 8, the government and the Reserve Bank of India have been changing the rules relating to withdrawal, exchange and use of the demonetised currency on an almost daily basis.

  • November 13: The limits for exchange of cash, daily and weekly withdrawal limits were increased
  • November 14: The cash withdrawal limits for current account holders were increased
  • November 21: The withdrawal limits for expenses related to weddings scheduled before 30th December were increased.

The frequent changes in rules have raised several rule of law concerns relating to the manner in which the Central government and the RBI are implementing the demonetisation measure.

The RBI circular of November 28 makes some more changes by relaxing the withdrawal limits. It links the relaxation to the amount of current-legal tender cash that has been deposited in the bank account since November 29.

We argue that the linkage between relaxation of withdrawal limits and deposits of current legal tender money is flawed, the circular is vague, it overburdens banks and depositors and adds to the prevailing uncertainty on withdrawal procedures.

Linking withdrawal to deposit of current legal tender

The RBI circular of November 28 ostensibly relaxes the withdrawal limits for cash from banks. However, it allows such relaxation only to the extent an equivalent amount was deposited, by the person seeking the withdrawal, in current legal tender.

This means that if since November 29, you have deposited Rs 10,000 in your bank account in six notes of Rs 1,000 and 80 notes of Rs 50, you will be entitled to a relaxation of only Rs 4,000 over and above the existing withdrawal limits, since notes of Rs 1,000 have been declared illegal tender. This is problematic.

Linking relaxation to deposit of current legal tender is flawed.

In a circular issued on November 14, banks were asked to keep track of depositor-wise information on the amount of deposits made in demonetised notes and the amount of deposits made in current legal tender notes. It is reasonable to presume that people who have had current legal tender (namely, currency notes in denominations other than the demonetised Rs 500 and Rs 1000 notes) in the last one month are not likely to have deposited the relatively scarce commodity back in their bank accounts. Hence, it is not clear who are the intended beneficiaries of this relaxation.

Second, there is no rationale for linking relaxation to the amount deposited in current legal tender. There can be various principles on the basis of which a framework may be formulated for a staggered relaxation of withdrawal limits. For instance, the relaxation of limits may be need-based or based on the past usage of cash. However, there is no link between the deposit that a person made and the extent to which her withdrawal limit may be relaxed.

The circular is ambiguous on its objective as well as what it asks of banks and persons seeking to withdraw cash.

At the outset, it says:

“It has been reported that certain depositors are hesitating to deposit their monies into bank accounts in view of the current limits on cash withdrawals from accounts”. 

This appears to convey that the objective of the circular is to encourage people to deposit the cash held by them in their bank accounts.

It then says:

”As it is impeding active circulation of currency notes (emphasis supplied), it has been decided, on careful consideration, to allow withdrawals of deposits made in current legal tender notes on or after November 29, 2016 beyond the current limits; preferably, available higher denominations bank notes of Rs 2000 and Rs 500 are to be issued for such withdrawals.”

This wording raises numerous questions:

  • Is the objective of the relaxation to encourage people to deposit their cash freely without an apprehension that they will be restricted from withdrawing it? If yes, it is unclear how limiting the relaxation on withdrawals to the money which has been deposited as current legal tender, will nudge people to deposit more cash. Or, is the objective of the relaxation to allow more legal tender to be circulated in the economy (as indicated in the emphasised language in the second paragraph of the circular)? Or, is it both?

  • Does it incentivise people to deposit legal tender money? Since legal tender is a scarce commodity, it is unclear why people will waste man-hours standing in queues to first deposit money and then stand in queue to withdraw. A related question is: Does it discourage people from hoarding cash? The answer is debatable. With frequent policy changes, people are uncertain of the next policy move. The uncertainty associated with frequent policy changes induce households to hoard and not spend whatever little cash they have at their disposal. A more predictable policy regime would nudge people to dispense with hoarding and plan their spending in a much more rational manner.

  • Will there be no limit on the withdrawal of cash deposits made in legal tender? Banks were instructed on November 14 to keep depositor-wise information of the currency denomination of the notes deposited. Surely, implementation of this measure by the banks would have taken time. In any case, were the banks maintaining such a record from November 11 to November 14? In short, if there is a dispute between the bank and a depositor on the amount that she deposited in current legal tender, how does a person wishing to withdraw cash in excess of the existing limits, prove that she had deposited an equivalent amount in the current legal tender?

  • What if the person proposing to withdraw cash, desires to withdraw cash in a denomination other than Rs 2000 or Rs 500? Will her request be denied or will she be persuaded to accept currency notes of Rs 2000 or Rs 500?
IANS
IANS

The relaxation increases the administrative burden of banks and increases the cost of withdrawal for the ultimate consumer.

This circular relaxes the withdrawal limits only for those who have deposited money in current legal tender. This requires mapping deposits made by customers since November 11 with withdrawals made by bank customers since then. It would impose a burden on banks who are already reeling under the pressure of increased workload owing to exchange and deposit of old currency notes. Moreover, it would increase the cost and difficulties associated with withdrawals since presumably, the bank customer may require to submit some proof that she had deposited the amount that she seeks to withdraw in the current legal tender.

The way forward

Newspaper reports indicate that this measure is aimed at discouraging people from hoarding current legal tender money and to encourage them to deposit it in their bank accounts. Hoarding is a symptom of the uncertainty that underlies the frequently changing rules on holding cash. People hoard because they are unsure whether they will be allowed to withdraw their cash once they deposit it in their bank accounts. The key to disincentivising the hoarding of current legal tender, therefore, lies in bringing about greater predictability in the rules for cash withdrawals.

The ideal situation would be that from a given date, say X, the limits on withdrawal are completely relaxed for all economic actors. While this inconveniences people relying on cash until X, it makes it possible to plan one’s affairs to account for the scarcity of cash. A gradual relaxation of withdrawal limits is the only way forward.

The process for gradually relaxing withdrawal limits must be such that (a) the rule of law is followed in the relaxation process and (b) people are able to plan their affairs in advance.

One approach could be to announce a calendar, scheduling the relaxation of withdrawal limits by banks. A tentative schedule of withdrawal relaxations will allow people to plan their affairs in advance, reduce the prevailing chaos and uncertainty resulting from multiple rule changes and conditionalities attached to withdrawals and exchanges of currency. More importantly, it will dispense with ad-hoc relaxations of the kind linked to deposits in current legal tender.

Looking into the future, this episode serves as a reminder to us about the problems of central planning. Once government embarks on intrusive involvement in society, there is a high likelihood of the authorities tying themselves into knots. The RBI’s failures on this subject are reminiscent of the RBI failures in other parts of finance where a detailed system of central planning is attempted. The problems of de-monetisation are not so much about the weaknesses of implementation as about the infeasibility of bureaucratic intervention in the working of society.

Radhika Pandey is a researcher at the National Institute for Public Finance and Policy. Bhargavi Zaveri is a researcher at the Indira Gandhi Institute for Development Research.

This article was first published on Ajay Shah’s blog under the title, “Intrusive detail in the rules associated with de-monetisation.”

We welcome your comments at letters@scroll.in.
Sponsored Content BY 

“My body instantly craves chai and samosa”

German expats talk about adapting to India, and the surprising similarities between the two cultures.

The cultural similarities between Germany and India are well known, especially with regards to the language. Linguists believe that Sanskrit and German share the same Indo-Germanic heritage of languages. A quick comparison indeed holds up theory - ratha in Sanskrit (chariot) is rad in German, aksha (axle) in Sanskrit is achse in German and so on. Germans have long held a fascination for Indology and Sanskrit. While Max Müller is still admired for his translation of ancient Indian scriptures, other German intellectuals such as Goethe, Herder and Schlegel were deeply influenced by Kalidasa. His poetry is said to have informed Goethe’s plays, and inspired Schlegel to eventually introduce formal Indology in Germany. Beyond the arts and academia, Indian influences even found their way into German fast food! Indians would recognise the famous German curry powder as a modification of the Indian masala mix. It’s most popular application is the currywurst - fried sausage covered in curried ketchup.

It is no wonder then that German travellers in India find a quite a lot in common between the two cultures, even today. Some, especially those who’ve settled here, even confess to Indian culture growing on them with time. Isabelle, like most travellers, first came to India to explore the country’s rich heritage. She returned the following year as an exchange student, and a couple of years later found herself working for an Indian consultancy firm. When asked what prompted her to stay on, Isabelle said, “I love the market dynamics here, working here is so much fun. Anywhere else would seem boring compared to India.” Having cofounded a company, she eventually realised her entrepreneurial dream here and now resides in Goa with her husband.

Isabelle says there are several aspects of life in India that remind her of home. “How we interact with our everyday life is similar in both Germany and India. Separate house slippers to wear at home, the celebration of food and festivals, the importance of friendship…” She feels Germany and India share the same spirit especially in terms of festivities. “We love food and we love celebrating food. There is an entire countdown to Christmas. Every day there is some dinner or get-together,” much like how Indians excitedly countdown to Navratri or Diwali. Franziska, who was born in India to German parents, adds that both the countries exhibit the same kind of passion for their favourite sport. “In India, they support cricket like anything while in Germany it would be football.”

Having lived in India for almost a decade, Isabelle has also noticed some broad similarities in the way children are brought up in the two countries. “We have a saying in South Germany ‘Schaffe Schaffe Hausle baue’ that loosely translates to ‘work, work, work and build a house’. I found that parents here have a similar outlook…to teach their children to work hard. They feel that they’ve fulfilled their duty only once the children have moved out or gotten married. Also, my mother never let me leave the house without a big breakfast. It’s the same here.” The importance given to the care of the family is one similarity that came up again and again in conversations with all German expats.

While most people wouldn’t draw parallels between German and Indian discipline (or lack thereof), Germans married to Indians have found a way to bridge the gap. Take for example, Ilka, who thinks that the famed differences of discipline between the two cultures actually works to her marital advantage. She sees the difference as Germans being highly planning-oriented; while Indians are more flexible in their approach. Ilka and her husband balance each other out in several ways. She says, like most Germans, she too tends to get stressed when her plans don’t work out, but her husband calms her down.

Consequently, Ilka feels India is “so full of life. The social life here is more happening; people smile at you, bond over food and are much more relaxed.” Isabelle, too, can attest to Indians’ friendliness. When asked about an Indian characteristic that makes her feel most at home, she quickly answers “humour.” “Whether it’s a taxi driver or someone I’m meeting professionally, I’ve learnt that it’s easy to lighten the mood here by just cracking a few jokes. Indians love to laugh,” she adds.

Indeed, these Germans-who-never-left as just diehard Indophiles are more Indian than you’d guess at first, having even developed some classic Indian skills with time. Ilka assures us that her husband can’t bargain as well as she does, and that she can even drape a saree on her own.

Isabelle, meanwhile, feels some amount of Indianness has seeped into her because “whenever its raining, my body instantly craves chai and samosa”.

Like the long-settled German expats in India, the German airline, Lufthansa, too has incorporated some quintessential aspects of Indian culture in its service. Recognising the centuries-old cultural affinity between the two countries, Lufthansa now provides a rich experience of Indian hospitality to all flyers on board its flights to and from India. You can expect a greeting of Namaste by an all-Indian crew, Indian food, and popular Indian in-flight entertainment options. And as the video shows, India’s culture and hospitality have been internalized by Lufthansa to the extent that they are More Indian Than You Think. To experience Lufthansa’s hospitality on your next trip abroad, click here.

Play

This article was produced by the Scroll marketing team on behalf of Lufthansa as part of their More Indian Than You Think initiative and not by the Scroll editorial team.