The Great Indian Vanishing Trick

Prime Minister Narendra Modi's shock announcement to demonetise the ₹500 and ₹1,000 currency overnight was primarily aimed at catching those who hoard black and illegitimate money in these denominations off-guard. The sudden announcement and its implementation within four hours of the speech may have prevented flight or conversion of such money into other asset classes, but it has also resulted in a lot of collateral damage. In the three stories to follow, Business Today examines the cost of the decision to the banking system; how hoarders are devising innovative ways to skirt the ban; and the tax implications for those who would wish to deposit old currency into their bank accounts.

- Anand Adhikari, Joe C. Mathew And Sumant Banerji

Imagine evacuating old currency notes of ₹500 and ₹1,000 from over 200,000 ATMs across the country. Replenishing with new notes of ₹500, ₹1,000 and ₹2,000 is not only a logistical challenge but also involves huge costs for banks. Hassled bankers, already struggling with low credit off-take and deteriorating asset quality, will have to incur these additional costs and at the same time profitably deploy the additional deposits coming their way.

Former finance minister P. Chidambaram was quick to give an estimate of ₹15,000-20,000 crore for the demonetisation process. The previous government didn’t opt for it as the cost-benefit analysis didn’t work.

“Economic destabilisation is far worse than any other event that could shake the country,” says Melwyn Rego, Managing Director and CEO of Bank of India. While bankers are tight-lipped on the costs and humming that national interest is paramount, they are quietly assessing the costs. The sudden decision has already pushed banks to deploy additional workforce and extend banking hours. “People from corporate and administrative offices have been deployed. The costs would include staff, overtime and logistics (topping up ATMs regularly),” says a banker, on condition of anonymity.