The dream of a cashless society

The dream of a cashless society: Demonetisation can make it come true and rev up financial inclusion — but there are caveats

Excerpts:
"The papers are replete with the proposition that to the extent that the amount of old ₹500 and ₹1,000 notes that are not replaced by issue of new notes by March 2017, the liability of the RBI gets extinguished and this reduction in liability could be taken into reserves by the RBI and transferred to the Government as surplus! This could help in the recap of the banks — what a great idea!

Is it really so simple? This neat solution troubles me. Suddenly, some clarity seems to emerge from a former staffer. Withdrawal of legal tender character does not extinguish the liability or the promise to pay by the RBI. Legally, as long as the old note is brought to the RBI’s counters, the promise has to be honoured.

Technically, it is possible to reduce liability in the balance sheet under “notes in circulation” but the consequent reserves created will have to be kept on the balance sheet to honour the promise any time the notes are surrendered in future. So there is no free lunch!"

My VIEW:
Promise to pay…

Usha Thorat’s article “The dream of a cashless society” (Business Line, November 14) lucidly explains several interesting aspects of demonetization and its impact at various levels of economy, from vegetable vendor’s purse to GOI’s resources. What one understands from Prime Minister Narendra Modi’s November 8 speech announcing that high denomination currency note of value Rs500 and Rs 1000 will not be legal tender from the midnight of Tuesday, November 2016 is that the action is in exercise of GOI’s power to alter the legal tender character of currency notes.
As rightly pointed out in the article, the GOI announcement does not impact the RBI’s promise to pay ‘value’ or the sovereign guarantee printed on the currency note. Therefore, legally, it would be wrong to make any adjustment in Reserve bank of India’s balance sheet with reference to the quantum of notes surrendered within any stipulated time limit. Such adhocism in accounting practices can lead to erosion of trust in institutions like Reserve bank of India.
As regards acceptance of ‘demonetized’ currency in public transactions, perhaps it is a misconception that it would be perfectly legal to accept them in the normal course till December 30, 2016 or March 31, 2017(As RBI will be exchanging these notes till that date), and need to be clarified by authorities. Extended time limits allowed for certain essential services like Railways, petrol outlets, hospitals etc relate to accountable transactions and these entities will be able to show source of further accumulation of high value notes after the midnight of November 8, 2016.
M G Warrier

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