RBI must deliver currency to banks on war footing: Ex Deputy Guv

Demonetisation will make our economy more inclined towards cashless transactions, says Jaimini Bhagwati, RBI Chair Professor. The financial sector of the country will benefit from improved efficiency and faster transactions.However, educating people on the benefits of bank account and their functioning is critical, he says, while suggesting even providing free food and logictics to the poor until things calm down.Usha Thorat, Former Deputy Governor of RBI, presents a different argument. Demoentisation, she believes, is not enough for a complete cashless economy. While the common man has been very accomodative and has waited in long queues in hopes of a positive outcome, she feels the RBI must work hard in making currency reach from the presses to banks on war footing.She also feels small borrowers must be allowed to repay in old notes to banks.Gurvinder Singh, Vice President of Bombay Goods Transport Association says the currency ban has made transport of goods on a daily basis challenging. The goods transport industry is 80 percent cash-dependant, he says. Apart from an average of Rs 500 that each driver has to be paid per day, Singh explains more cash is needed to pay penalties and unloading charges.He hopes the government raises withdrawal limit to Rs 5 lakh per week.Below is the transcript of the discussion. Q: I was under the impression that you people have already got some kind of relief. Loans upto Rs 1 crore can be repaid with a lag and NBFCs and banks don't have to provide for them or classify them as NPAs. What then is the problem at your end? Suresh: Our request was very clear. We said that these 3.5 crore women borrowers would find it very difficult to be able to pay in the new legal tender and so for a very short period, subject to such caveats as tenor and a limited timeframe, can the regulators look at we collecting the old Rs 500 or Rs 1000 notes in terms of the repayment and this would deposited in various banks. We would also be able to give a complete documentation because all are customers have a KYC norm, have some kind of the other of KYC. We could file returns with the RBI in fact in terms of the collections made between this period which could say extend up to December 31 and in all probability at least give them the comfort that there is no kind of funnelling of black money possible here. Q: What is your specific problem in terms of a cash crunch? Singh: We have a few short term problems and long term problems. Short term problems being functionality at the moment. We do not have enough cash to function. This industry is 80 percent dependent on cash. We are not able to function on a daily transactions as such. We need the pay the drivers approximately Rs 500 for eating on a daily basis. Long term journeys involve, journeys of 20-25 days to the north east part of India. Toll taxes are involved. There are lot of loading, unloading charges with a lot of labour unions which professionally charge you only in cash. With regards to the payment of penalties which are charged at state borders, with regards to over sized consignments all these need to be paid in cash at the same time. If my consignment is oversized at Maharashtra border, I have to pay a fine of Rs 10500 immediately in cash and that is just for one vehicle. If I have a fleet of 50 plus vehicles multiplying the same immediate effect onto these things, for example let us take 10 vehicles are usually in transit towards this one point, I do not have enough cash to function as such. So, this business is going to come to a standstill because of non-availability of cash. Q: Your prime request would be that the withdrawal limit be raised to how much? Singh: Fuel consumption is still okay. A few people have petro card systems which work like debit cards to purchase diesel but the point is these petro cards can be recharged when you pay in advance. So, I need to recharge the card well in advance which is okay for a systematic organised player who has enough funding coming from the bank. However when it comes to small transport operator who does not have such funding, who relies on cash availability that he generates on the route and then he keeps fuelling up, he cannot avail such a system functionality and he cannot adapt to the system in such a function that tomorrow you turn this entire cash transaction into plastic money, it is going to take some time. Q: You told me that a small fleet operator is defined as someone with 5 trucks, surely he will have a bank account. BPCL can give him a petro card? Singh: Yes but what about the amount that he needs to pay in advance? Where will that come from? Q: All these years would not a 5 truck operator have enough money to give an advance to BPCL? Is it so hand to mouth that at least your diesel needs to be able to be serviced in plastic? Singh: It involves a time delay. Once a contract has been confirmed, the vehicle needs to be loaded. For loading it requires money. Q: I accept your food and your check naka payments and all that but I was just wondering if some part of it can be done through plastic. So, your request therefore is that the withdrawal limit be raised to how much? Singh: Approximately Rs 5 lakh a week for a standard transporter to operate. Q: Since you have gone through practically every department in the Reserve Bank, how does the arithmetic look to you, we know something about the printing of notes at the Security Printing and Minting Corporation of India Limited (SPMCIL) as well as at the Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) the two printing agencies. Do you think it is going to be a long time before RBI will be able to raise the cash limit the withdrawal now is pretty small it is Rs 50,000 for an operator like Gurvinder? Thorat: I think we have to discuss this issue in terms of the shortage of currency on one hand and how to really deal with the short term problem of alleviating the pain of so many millions and millions especially small people both in the urban and the rural areas and amongst the truckers as well. I think on the one side we look at the issues relating to currency management. I am sure the Reserve Bank and the government are doing the best they can making the presses work to 3 shifts maybe and producing Rs 100 and new Rs 500 inasmuch quantity as possible. Lifting the currency directly from the presses to the chests and then making sure that we use all the like on a war footing use all the military trucks and the planes and the trains and whatever possible and also recycled soiled notes of low denomination, we may have to put with dirty notes for some time, but that’s better than not having any notes at all and also we need to remove the accumulated cash from the various centres where the vaults may have been full and unless that is removed, you can’t really provide new notes. I think on the aspect of distribution, production of notes, printing of notes, issuing notes and calling back notes - - the logistics and the kind of an emergency like measures, I am sure are clearly being taken and they just need to be stepped up. Now coming to how do you then deal with the other problem, I think we can divide this into two; one is do we consider any relaxation to the use of the old notes. Clearly November 24 for use of old notes for specified purposes, we need to extend that date and that almost an imminent requirement. The other one is for allowing old notes to be used for repayment of loans, including overdue loans, maybe up to a certain value limit, growth in NBFCs, banks, MFIs may be mapped into permanent account number (PAN) and other Aadhaar Cards. Also the Sage which are linked to the banks this is something that we could allow, because these people are going to repay their loans only in the old currency and the worry is that for the Reserve Bank is that whether you are opening one more window where money could be somehow laundered, but I think that is a risk and there is a benefit easing the pain benefits. So, I think there is a balance of judgment one has to use and maybe one has to depend upon the reporting system to really then track wherever there are unusual aberration in this and whether it has been misused. The other I think more important thing is whether we can really for a short time think of a small value prepaid card in the denomination of say Rs 2,000 and Rs 10,000 which would be like a bearer card which will definitely have a validity up to December 31, which could be issued by banks and the payments providers, which can be used at any point of sale (POS) outlet. Now it would mean that you will have to buy a card with a new Rs 2,000 note, but since change is difficult it can be used at any terminal and then you are really trying to then substitute plastic for paper currency is clearly a problem -- so using even paying salaries and wages such that. Q: You heard the near term problems faced by MFIs and the transporters. Do you think that this is an operational botch up and could have been better implemented? Bhagwati: Well, I don’t know the nitty-gritty of how exactly this is being worked out. I want to take a step back, because I heard the first speaker, Sudha mentioned the difficulties of those who are perforced in the cash economy, because they have no other option. I am not entirely sure that that the transport industry was perforced in the cash part of the economy. It shows to some extent I feel. On the short term I am not clear why government is not treating it like a manmade calamity in that sense, because when there is a natural calamity like an earthquake or flood or a hurricane district administration also gets involved and I think district administration needs to be more involved in the shorter term, but in the longer term I think government has to explain that this pain and I don’t know whether you want me to explain this now in terms of my understanding. Government needs to explain that those who are perforced in the cash economy are facing a lot of hardship and it has to be explained to them that why this is necessary in the longer term, because this I feel is Prime Minister Modi’s the most important political/economic decision since he came to power in May 2014. Q: What is your own estimate, what can the near term loss is not just in terms of the operational pain that the transport operators and the microfinance guys are detailing to you, with trucks getting stranded a lot of SME companies, steel utensil companies told us that, plastic mug makers have told us business has come to standstill for many of these guys, because transport has come to a standstill. More as an economist do you think that there is so much long term gain over here that is offset by this near term loss? Bhagwati: You are absolutely right this needs to be thought through, when we talked about the near term pain it is not just the pain of those who are involved in the cash economy, there will be an economy wide downturn my sense is that this cash crunch will lead to lower inflation, but it will also lead to a lower growth as economic activity either slows down or stops in various segments of our economy. The longer term gain is only possible if we are able to not address just the stock of unaccounted wealth, but also the flow in terms of how it gets accumulated and for that to happen demonetisation is not enough. We need to phase out all notes beyond Rs 100 note. I don’t think there is anybody who is poor who gets a monthly income of more than Rs 30,000 and Rs 30,000 you can disburse in Rs 100 notes - - so along with what is going on right now should be explained to people that over time over the next 2-3 years depending upon how convenient and feasible it is for RBI and the government to do this, we should phase Rs 500, Rs 1,000 notes and definitely not have Rs 2,000 note.