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Renegade Bank of India, RBI?

Renegade Bank of India, RBI?
Today, the RBI has again turned another of its own directives on its head and landed a new clanger in on the banks in the name of scrutinising black money. It now says no one can deposit more than Rs 5000 in their bank accounts in old notes unless they can explain in the presence of two officials of the bank why they have not deposited their money till date. This whole demonetisation drama is gradually turning into a Kafkaesque nightmare. The RBI and Prime Minister Narendra Modi had both formally declared that people will be able to deposit all their old demonetised notes of Rs 500 and Rs 2000 until December 31. 

Now they imply that people should actually have done so much earlier and if they haven’t, they must be black money hoarders or money laundering agents. This surreal inability to stick to its own script has turned our country’s Central bank into the laughing stock of the world. As has the craven surrender of its independence, as it dances to the whims and fancies of its political masters. Has the Central bank of any civilised nation behaved like this in recent times? Perhaps it should be renamed Renegade Bank of India for its many unlawful pronouncements and its constant shilly-shallying where the honouring of its own directives is concerned.

Though RBI may catch a few black money operators and money traders in its net through this latest directive, there will be thousands of others who will suffer the consequences of its latest policy backflip. Primary among them will be farmers. Millions of farmers were given permission by the government to buy seeds with their old currency notes without any cutoff date. Many of them took it as a signal that they could deal in the old currency for other purposes such as buying or selling their crops, buying diesel for their generators or selling or buying fertiliser and farm machinery until December 31, without fear of penalties. This was especially so because the RBI was unable to provide enough currency notes to the banks and farmers had no other option but to deal in the old notes. Businesses related to farming, such as wholesale trade in farm produce at the various mandis, etc, were also dealing in the old notes. 

Since farmers thought they had till December 31 to deposit their old notes, and were busy with the sowing season, many of them may have postponed the rather onerous task of trudging miles to the bank and standing in queues for hours to deposit their money, in the hope that the lines may shorten soon. The same goes for daily wage labourers working in the fields who may have been paid with old currency or even workers in small business clusters hanging onto their wages paid in old Rs 500 notes till they were able to open a bank account and many other equally hapless sections of society. Add to this old people, people who had been bedridden due to illness, or women and disabled people who did not have the physical strength to stand repeatedly in queues for days and hours on end and had been hoping that the situation would ease soon so they could finally deposit their money.

Since December 31 is almost upon us, the Banks’ refusal to take their money might cause further shock and despair as they see their paltry savings going up in smoke. Few of them have the resources to travel to zonal branches of the RBI after December 31 to exchange their notes, thus leading to further deaths, suicide attempts, etc. Many people had also held onto old notes to pay electricity and other bills at various government institutions which were accepting the old notes as legal tender till December 15, and they may have had a few notes left after this date. Haven’t people suffered enough, and does not the RBI and the government have the blood of more than 100 people on its hands that it should so callously inflict more pain? Even the Central bank of Venezuela stopped the demonetisation exercise recently after the death of just one person. Granted, most people in India have already deposited their old notes, but are banks justified in not honouring the old currency of even a single person just to catch a few black sheep? Won’t banks, that are reeling from the flurry of RBI directives, simply reject all desposits above Rs 5000, instead of examining each case on its own merits?

The RBI has repeatedly gone back on its word and arbitrarily changed its own directives on a number of occasions. First, it sent a directive to banks that the antecedents of deposits up to Rs 2.5 lakhs made after November 8 will not be examined. But suddenly it sent a directive last week, asking banks to provide data on all accounts which did not have more than Rs 2 lakh before November 8 but does so now. RBI wants all suspicious transactions in such accounts after November 8 to be reported, if it received money over and above Rs 2 lakh. Banks were earlier providing information to the Financial Intelligence Unit only on accounts where customers had deposited more than Rs 2.5 lakh but now their workload has further increased.

Though RBI refuses to say a single word in defence of overworked banking staff who have gone over and above the call of duty in honouring the many flip-flops of the RBI without question, it keeps piling more and more work on the already overburdened banks through its new directives, while allowing suspicion to be cast on their honesty and integrity and never revealing even once that it is the fault of the RBI that banks are unable to distribute cash as RBI is simply not sending them enough. The bank officials now have to do a lot of extra work, especially in examining accounts where a lot of deposits and withdrawals took place before and after November 8 so that the deposited amount did not remain steady, before it can send accurate information to the RBI. RBI has also asked bank officials in tier II and III cities to report any suspicious jump in deposits after November 8, specially in zero balance accounts. RBI has asked banks to undertake audits at all branches and currency chests where they spot unusual patterns of cash movement, and maintain all withdrawal and deposit slips, so that illegal note swaps do not take place. This is why RBI is not so interested in stocking up ATMs, as number of old notes deposited and new notes withdrawn can be compared more easily from withdrawal and deposit slips.

If rumours are to be believed (and many rumours have later turned into facts), banks are also being asked to keep a watch on the lockers of HNIs, who are frequently accessing their lockers after demonetisation and taking away large bags, so that RBI can forward this information to the IT department, as huge stashes of old currency notes and large amounts of gold have also been discovered in some lockers.

But why would the country’s premier banking institution be so desperate to tar ordinary people’s accounts with the taint of criminality at every opportunity instead of concentrating on the big fish alone? Should people living in glass houses throw stones at others? A news report by a premier Hindi news channel has claimed that the Central government and investigative agencies were keeping watch on very senior RBI officers with the rank of Deputy Director, who have responsibility for disbursing money from the RBI’s currency chests to various banks, for blatantly misusing their position to help officials of various banks launder money for wealthy individuals. For every Rs 1.25 crore in old notes handed over, the officials allegedly handed over Rs 1 crore in new notes. The remainder was presumably their fee. These notes were sent not to banks but directly to the homes of individuals whose money was being laundered. Though two RBI officials were arrested in Bangalore, the news reporter from this channel, who filed his report standing in front of the RBI’s gates in Delhi, seemed to imply that it was RBI officials in the capital who were under scrutiny. He also claimed that RBI officials in the various zonal offices across the country who handled the currency chests were also under watch. Since the owner of this TV channel is close to the most important figures in the government and party, the channel must have got this information direct from the horse’s mouth and there is no reason to doubt its veracity.

There is nothing either reserved or dignified about the recent behaviour of the Reserve Bank of India. The RBI has performed a conjuring trick, probably on the instructions of its political masters, and suddenly inflated the amount of demonetised currency it earlier claimed was in circulation. We assume that the RBI owns a few calculators and has some number crunchers on its payroll, who could have calculated well before November 8 (since they were aware since September that demonetisation was imminent), how many Rs 500 and Rs 1000 notes were in circulation. The figure given out on November 8 was Rs 14 lakh crore, give or take a few thousand crores. Finance Minister Arun Jaitley, stuck to this figure till the first week of December, but then the figure began to gradually inflate, first to Rs 14.5 lakh crore, then Rs 15 lakh crore and finally Rs 15.4 lakh crore. 

Now a figure of Rs 16 lakh crore is also being bandied by about by some news channels. Surely the RBI was not printing more old notes after demonetisation started? Or is it a mere coincidence that these figures started morphing from the time the government realised that almost all the money in circulation may be returning to the banks. If Rs 14 lakh crore comes back into the banks by December 31, then the gain is zero, and all the pain inflicted by the demonetisation drive would have been for nothing, but if the figure withdrawn from circulation is Rs 15.4 lakh crore and the amount returned is Rs 14 lakh crore, then the RBI can do some creative accounting and show a windfall gain of Rs 1.4 lakh crore, which it can hand over to the government as dividend, and all shall be well with the world.

It is scandalous that the RBI gave the Finance Minister of the country incorrect figures on how much high denomination currency it had demonetised on November 8, and if it did not, why did it do nothing to come out and correct this figure which he had repeatedly announced to several news outlets. Even more scandalous would be the fact that the RBI had later manipulated these figures at the government’s urging.

The craven surrender of its independence can be seen from the fact that due to political compulsions the RBI was forced to airlift Rs 5000 crore to banks in Uttar Pradesh recently, just before PM Narendra Modi arrived there for a parivartan rally, at the expense of many hard-hit states and cities in the country like Manipur, which was put under curfew after violence erupted due to the fallout from demonetisation and an economic blockade imposed on the state. Many banks in the nation’s capital, New Delhi, and also in the commercial capital, Mumbai, are also running on empty.

But a mysterious lack of queues was also seen in Bihar a while back and bank officials claimed that RBI had dispatched more than enough cash for its coffers to manage demand for several weeks. This was just after political parties there were loudly demanding answers from the state’s BJP unit for buying several large tracts of land in the name of its party President Amit Shah, for which it paid in cash just before demonetisation was announced. The rumour is, that since elections are also round the corner in Punjab, just like UP, it will also benefit from the RBI’s largesse, while many other states are denied their rightful share of the new currency.

If the RBI indulges in conspiracies with the government, it will give rise to conspiracy theories. Baba Ramdev, a much revered figure in BJP circles, who has been liberally doling out advice to Prime Minister Modi on how to make the demonetisation drive more successful, claims that demonetisation could not be implemented properly because the Prime Minister had been misled by the banks, and the reason almost all of the withdrawn notes had returned to the banks was that the RBI may have earlier surreptitiously printed double quantities of these high-value notes with the same serial numbers, and the government would soon discover a scam of Rs 4 to 5 lakh crore on the books. The probability of him coming up with this brilliant explanation on his own is remote and it must have been conveyed to him by a senior political figure, who finds the RBI a convenient scapegoat for the government’s own sins of omission and commission.

The government has found a willing sacrificial lamb in the RBI Governor Urjit Patel, the answer to whose baffling silence during this entire fiasco may lie in his past. Patel was an independent Director and the Chairman of the audit committee of the Gujarat State Petroleum Corporation (GSPC) from FY’06 to FY’13 when Narendra Modi was the Chief Minister of Gujarat. GSPC is a Gujarat state public sector company, under the Ministry of Petrochemicals & Energy and its Minister was Saurabh Dalal Patel, who was known to be close to then Chief Minister Modi. During Patel’s time, GSPC’s loans from banks ballooned from Rs 270 crores to Rs 14,000 crores. GSPC had a joint venture with another company Gujarat Natural Resources Ltd (GNRL) for many of its oil and gas blocks and Saurabh Patel, the Minister overseeing GSPC, is a beneficiary investor in GNRL. Urjit Patel, as an independent director and chair of the audit committee of GSPC, not only approved GSPC’s excessive borrowings from banks that he now oversees as RBI Governor but also failed to highlight the conflict of interests between the Minister overseeing GSPC while being an investor in GNRL. It is this loyalty which must have stood him in good stead when he was chosen as RBI Director.

But his loyalty does not seem to have rubbed off on the officials who work under his stewardship. It is being gossiped with great glee by Prime Minister Narendra Modi’s detractors that he was forced to hurriedly bring forward the date of demonetisation without sufficient money being printed, though it may have been originally planned for January 2017, as he suspected there had been a leak in the system about his demonetisation plans after he was informed that there had been an unprecedented rush of bank deposits of Rs 4.8 lakh crore in September and a withdrawal of more than Rs 1 lakh crore in October. The leak, it is believed, may have occurred from within the RBI or its printing presses as only a handful of trusted officials in the Prime Minister’s inner circle knew of his plans.

The RBI’s website has several notifications on the Pradhan Mantri Garib Kalyan Deposit Scheme, 2016, as it will be the custodian for these deposits, but RBI may soon find itself in hot water after the demonetisation dust settles, for committing another unconstitutional blunder. Those who declare black money under this scheme will not only have 50 per cent of it deducted as tax and penalty, they will also have to keep 25 per cent of the undisclosed income in the Pradhan Mantri Garib Kalyan Deposit Scheme, 2016, for at least four years, without being paid any interest on the money. Not only may this be seen as unlawful, it may also be unconstitutional, as the centre is bound by the constitution to share all revenues raised through taxes with the state governments after depositing it in the Consolidated Fund of India. The RBI, by withholding a certain amount which it keeps for the sole use of the centre and which it refuses to share with the states, may be hauled up by the courts.

The RBI, an institution predating Independent India and mandated by Parliament to manage our currency and financial stability, has allowed itself to be co-opted by the Ministry of Finance and become a puppet in the hands of Government of India. How can the head of the RBI that is responsible for the current currency crisis not speak up on the allegations made against it and assure the nation of the RBI’s autonomy and of the impartiality of our banking system which must treat both rich and poor without fear or favour, during this grave crisis? Like Caesar’s wife, he must be above suspicion, but in this situation, people can only interpret his silence as weakness at best and active collusion at worst, neither of which bodes well for the independence of future RBI Governors in the years to come.

(The views expressed are strictly personal.)
Moutussi Acharyya

Moutussi Acharyya

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