Even as the aim of financial sector reforms in the past nine years has been to bring transparency in the financial transactions across different sectors and bring the unbanked population into the fold of the formal financial system, these reforms at the same time have been scary for the general public. The most frightening act was the banknote reforms when the government demonetized Rs.500 and Rs.1000 currency notes in November 2016.
A host of problems erupted like a volcano post demonetization of these high-value currency notes.
The unprecedented move put common masses in a fix. Those who had kept their money in bank accounts cursed themselves as the government imposed certain restrictions, though temporary in nature, in withdrawal of cash.
This segment of depositors felt cheated by the banks as they were refused access to their own money at will. Interestingly another segment of the general masses who had kept their savings in cash at home also cursed themselves for not keeping their money in a bank account as they were made to spend hours, even in many cases days together in a queue at a bank branch to exchange their invalid currency notes.
So, in both ways mental agony hit the general public. Over a period of time, the demonetization proved an instrument of change as most of the people started looking upon ‘bank branches as good as police stations’ where in the name of ‘Know Your Customer’ (KYC) norms customers are ‘grilled’ to divulge even those details which normally a bank is not supposed to know about its customers.
You may be wondering why I am discussing demonetization which is now a subject of a past and already much debated issue in the media by a galaxy of experts. Actually, there are queries from a cross section of people who have expressed their concern following the announcement of withdrawal of Rs.2000 currency notes by the Reserve bank of India.
There is an interesting observation. Many bank account holders after the demonetization drive in 2016 either stopped operating their bank accounts or have been rarely using the bank account for financial transactions.
Most of the time, they bank upon informal financial transactions to avoid ‘unnecessary surveillance and harassment’. What they do is that they usually keep cash at home or at some other place sacrificing earnings on the idle cash. This kind of customer segment is now in dilemma as Rs.2000 notes would possibly be major part of their cash in hand.
Why was Rs.2000 introduced and why withdrawn?
In November 2016, Rs.2000 notes were issued to replace the Rs.500 and Rs.1000 notes, which had accounted for 86 per cent of the cash in circulation, to quickly remonetize the economy. The high value currency note of Rs.2000 was introduced under Section 24(1) of the RBI Act, 1934 which simply states that the maximum denomination a note can be is Rs.10,000.
According to the RBI data, the stock of Rs.2000 note with the public was Rs.6.57-lakh crore for FY 2016-17 constituting 50.2 per cent of total currency in value terms. It peaked at Rs.6.73-lakh crore in FY 2017-18 (37.3 per cent in value terms), gradually coming down to Rs.3.62 lakh crore as at FY 2022-23, accounting for 10.8 per cent to total banknotes in circulation in value terms. The printing of these notes was stopped in 2018-19.
Now the Reserve Bank of India (RBI) withdrew these banknotes from circulation by saying, “This denomination is not commonly used for transactions” and that the notes are “at the end of their estimated life-span of 4-5 years” and its withdrawal was warranted by the “Clean Note Policy” of the RBI.
However, the apex bank has maintained that despite withdrawal, the ₹2000 note will continue to be legal tender which means that these notes are “legally valid for the payment of debts and that must be accepted for that purpose when offered”.
Meanwhile, the RBI’s decision to withdraw this denomination is also reported to be due to increased fake currency in circulation. According to the RBI Annual Report 2021-22, counterfeit notes in the denomination of Rs.500 and Rs.2000 had recorded an increase of 101.9 per cent and 54.6 per cent, respectively, over the FY 2020-21. if the present withdrawal of Rs.2000 note is based on counterfeiting issues, the fate of and protecting the currency from concerted onslaught of forgery and counterfeiting”, will the same fate beckon the Rs.500 notes also hangs in balance as the fake note circulation in this denomination is higher.
Are banks required to report deposits of Rs.2,000 banknotes to the income tax department?
Large cash deposits made during the ongoing phasing out of Rs.2,000 notes would be under the radar of tax officials, who routinely comb through the data to detect tax evasion. If reports are to be believed, banks will be required to notify the income tax department about large cash deposits of Rs.2,000 banknotes above a threshold. The reporting is as a part of the statement of financial transactions (SFT) they are mandated to submit to the tax authority annually. The reporting thresholds stand at Rs.10 lakh for term and savings deposits and Rs.50 lakh for current account deposits. This reporting system has been in existence for a long time and is not a new provision in the wake of RBI’s decision to recall Rs.2,000 notes.
What is the underlying message one should read in demonetization and withdrawal of banknotes?
Whatever the circumstances, don’t make the flow of your money stagnant. Keeping cash at home or in a safe vault at any other place will over a period of time only result in the loss of value of the money stored. For example, If you have a cash of Rs.10000 stored at home or in a safe today and you keep it there for a long period like 5 years or so, you will find it worth a lot less after the said period. Even if you can buy something for Rs.10000 today, you will probably require Rs.15000 to buy it 5 years from now. This means, you will be losing money without even knowing it. The more cash you keep idle at home, the more you will be losing its value.
So the situation suggests that you should not keep your money idle at home. If you want to save your money from losing the value over a period of time and at the same time multiply it, better would be to keep the cash deposited in a bank scheme or invest the money in a financial instrument which is suitable as per your risk appetite.
Here’s a small but significant tip to let your money talk. When you make an investment, make sure that your rate of return on the investment is higher than the rate of inflation. As all of us know, inflation is a phenomenon where the prices of everything shoots up over time. The rate of return is how much you make on an investment. Suppose you invest Rs.1000 in the market and over a year , you make Rs.1200, then your rate of return is 20%. The rate at which the prices of commodities goes up is called the rate of inflation.
Last but not the least. A bank is actually one of the safest places for your money. You earn interest when you deposit any amount in a bank scheme, be it a savings bank account or any fixed deposit instrument, The percentage of interest from a bank may not seem like a lot, but at the end every bit counts. Above all, you will insulate yourself from the act of any demonetization or withdrawal of currency notes.
(The views are of the author & not the institution he works for)
Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.
The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.