For the record, this wasn't the first demonetization. This exercise was also carried out once by the British Raj in 1946. Needless to say, the scene was similar to what it is now. There were unending queues at banks and lots of money exchanged. The window offered was a tad shorter, of just a few days.
However, at that time the move was a total failure. The British Raj didn't have the necessary machinery to deal with such problems. Peasants and other farmers rose in revolt against their colonial masters.
And yeah, it didn't succeed in eradicating corruption. Black money flourished even in the Post-Independence Era. However, these events did spark widespread unrest leading to lots of communal riots which finally culminated into the Partition.
Demonetisation in 1946
Demonetisation in 1978
In 1946, all 1,000 and 10,000 rupee notes were recalled. In 1978, 1,000, 5,000, and 10,000 rupee notes were demonetized.
India had the bear the wrath of yet another demonetization after PM Modi announced on November 8 that Rs. 500 and Rs. 1000 notes from midnight ceased to be legal tender. It was a night announcement. However, the next day all the three stock indices BSE SENSEX NSE fell down and crashed.
And there were the banks. Even they had no cue of what was going on. They had hoards of money stashed with them which were of no use now. I'll come back to this soon.
Then, of course, Social Media ran lots of bogus rumours and other related stories. The first was about how there was some NGS Chip inside the 2000 note which enabled satellites placed in orbit to track where we have lots of currency stashed. The Finance Ministry clarified that there is no such thing. Then it came into view that quite a few of the people noticed that the ink came off when the note was wet. This too was clarified to be nature of the unique kind of ink being used in the printing process.
The latest one doing the rounds is of radioactive ink in the notes. The Ministry has refused to comment on this.
Banks are working double shifts trying their level best to help all the people exchange their currency notes. Quite a few other avenues were offered to the willing. The old notes were accepted for a short time at certain places as in Petrol Pumps, Toll Plazas, LPG Stations etc.
A complex series of measures were introduced to check the fraudsters in between. Even now as I type this the Income Tax Department is working hard to catch those who stashed lots of black money and may or may not have been successful in converting them into the new currency.
The machinery behind all this is entirely complex. It's money working for you in a way. I'll try my level best to use my knowledge and try to explain the process of Demonetization. All this has been the effort of reading boring finance articles and trying to figure it out.
Well, let's begin with the banks. The problem with banks is that they have vast amounts of money kept with them. The RBI has a system of checks and balances which it calls ratios and rates. There are two ratios, SLR and CRR. The third one is the Repo Rate. SLR is Statutory Liquidity Ratio and CRR is Cash Reserve Ratio. The RBI has the mammoth task of controlling these to keep a tab on the economy. It faces flak, causes much more trouble than it's worth and so on.
The Reserve Bank of India is vested with powers concerning the use of currency in India, the control of its circulation and to check its misuse as under the Reserve Bank of India Act, 1934, as and when amended from time to time. The Government of India is given powers to mint coins as per the Coinage Act, 1906.
Cash Reserve Ratio as the name suggests is the amount of money kept as a reserve with the Central Bank. Banks are mandated to store a certain portion in the current account of the Reserve Bank of India. Understand that this is the money that is not in circulation. Banks can't invest any money from this amount. Neither are we supposed to withdraw any money.
Statutory Liquidity Ratio is the amount of money which remains blocked for statutory reasons and is not available for investment. It puts a certain amount of pressure on the banks balance sheets. However, at the same time that money remains safe and with that mechanism RBI also offers safety to the depositors who have invested money in the banks.
The Repo rate is quite important as it is used to control inflation. It is the rate at which the Banks borrow money from the RBI. In other words it is the cost of short term money. A higher Repo rate decreases inflation and controls the borrowing of money. A low Repo rate is usually ideal which helps in borrowing money at a good reasonable rate.
Enter November 8, the PM announced that 500 and 1000 notes ceased to be legal tender. It was a closed cabinet decision which only Modi and the finance minister knew about. Vast swathes of currency became useless overnight.
The RBI requested banks to lend it the deposits they have in phases. Note the time gap. We are still a fortnight away from December 31, and banks are working overnight to ensure nothing goes wrong. The RBI is now busy devaluing those notes and discarding the old notes. It has a centralized CVPS Currency Verification and Processing System for the purpose. It is the same system that is used for exchanging soiled and mutilated notes at branches of all popular banks.
RBI decreased repo rate and asked banks to withdraw some money from it and supply to the citizens. There are four presses, two belonging to the RBI and two to the Government which are responsible for printing currency. These presses were now under heavy load as they had very less time and a lot of well... printing to be done.
NCR Corporation India oversees the entire process to ensure that cash reaches on time and all the ATM's are recalibrated and replenished.
Two presses, in Nashik and Dewas, are controlled by the government under Security Printing and Minting Corporation of India Ltd.; the other two, at Mysuru and Salboni in West Midnapore district some 150 km from Kolkata, are run by the Bharatiya Reserve Bank Note Mudran (P) Ltd, an RBI subsidiary. They work round the clock to ensure that sudden peak in demand of notes is met at the earliest.
Next came stage three. Demonetization ensured that banks had large amounts of money lying unsafe outside. All the deposits made to the banks in demonetized notes were technically lying in the open. On November 26, RBI finally increased incremental CRR Rate to 100%. This meant banks were forced now to deposit all the money with them into RBI account. This was done to absorb the excess liquidity present in the system.
This explains the entire process. As a finishing touch, December 7, RBI again revised CRR Rate and dropped the 100%.
However, this doesn't mean that the process is complete. NDTV reported today about how it doubted the IT regarding the machinery used to conduct so many raids leading to Crores of money being found inside Cars, Bank Vaults, and yeah the most recent and interesting one - inside the bathroom! According to news, it is being said that there are sleuths and whistleblowers watching out for suspects carrying huge amounts of money.
In short, one can do nothing but marvel at Modi's genius for execution of such a brilliant plan at a large scale level. However, we do realize that a lot of hardships have to be suffered by even the common folk who have nothing to do with black money and all that.
There is a silver lining. India has also become the first country to officially offer incentives and discounts on using ePayment facilities either through cards or net banking. The Government recently announced various measures to increase the people who are using net banking facility. Villagers are also being urged to follow suit. Those without smartphones are being asked to do mobile banking, a great innovation which even I have not heard of.
I shall end this article with a few closing points on net banking. I guess it's becoming a little long..
Net banking using cards and wallets is basically new technology which is yet to grow. Qualcomm, a leading mobile technology giant recently showed how unsecure our mobile payments apps were. It said that all of them run on Android surface level integration and not hardware level integration which makes them largely unsafe.
With so many people going online in a few months, it's time we built some really great security. Also public should have awareness about the dangers of net banking, phishing, fraud calls etc. So I guess it's time we woke up and tried our level best to ensure secure banking facilities for everyone.
