After the demonetisation exercise announced on 8th November, the Government and RBI have been changing the rules relating to withdrawal, exchange and use of the demonetised currency on an almost daily basis.
- 13th November: The limits for exchange of cash, daily and weekly withdrawal limits were increased
- 14th November: The cash withdrawal limits for current account holders were increased
- 21st November: 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 Reserve Bank of India are implementing the demonetisation measure. The RBI circular of 28th November 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 9th November. 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 28th November 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 9th November, you have deposited Rs. 10,000 in your bank account in 6 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 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 14th November, banks were asked to keep track of depositor-wise information on the amount of deposit 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 14th November 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 11th November to 14th November? 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?
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 11th November 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 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. RBI failures on this subject are reminiscent of 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.