Demonetisation: Undeposited old notes may result in windfall for government

Some of the funds may be used for reacapitalising public sector banks.

Written by Aanchal Magazine , Sunny Verma | New Delhi | Updated: November 17, 2016 1:36 pm
demonetisation, modi, pm modi, narendra modi, india demonetisation, currency ban, old currency, 500 note ban, 1000 note ban, atms, demonetisation effect, indian express, national news, india news The central bank will have to see how to manage this money that does not enter the banking system,” a finance ministry official said. (File Photo)

The amount of old Rs 500 and Rs 1,000 notes that are not deposited or exchanged with the banks can result in a windfall to the government, but senior finance ministry officials said the government has not yet thought about how to account for it or how to deploy it.

Some of the windfall may come to the government in a staggered manner and can be used for reacapitalising public sector banks, official said. Currency issued is a liability for the Reserve Bank of India (RBI), which owes a particular value to its holder. Any money not coming back to the banking system will reduce the central bank’s liability to that extent. “Pulling out the old notes may theoretically result in a windfall gain, as the reserve money will shrink to extent of old currency not flowing back into the system. The central bank will have to see how to manage this money that does not enter the banking system,” a finance ministry official said.

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Another ministry official said the government has so far not thought about how to account for such gains, and any gains if at all will accrue from the next financial year only. Gains will also have to deployed in a calibrated manner, officials said.

The RBI may transfer such gains to the government via payment of dividend or may chose to keep it in reserves. “Some of the value of Rs 500 and Rs 1000 notes that are not deposited may come to the government in the form of dividend. But all this will have to decided once we know how much amount remains unclaimed from the notes that are reprinted,” the official said.

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Even at the time of demonetisation in 1978, 25 per cent of the cash with public did not return to the banking system. SBI in its research report said around Rs 2.5 lakh crore or more may not be converted around this time. Around Rs 15 lakh crore worth of Rs 500 and Rs 1000 notes are in circulation in India. Kotak Securities Ltd said in a report on Wednesday that the RBI may be calibrated in its payment of any surplus accruing from any unaccounted cash.

“As of now, there is no cut-off date for submission of the notes with RBI after the December 30, 2016 deadline with the banks. Once the cut-off date is announced, RBI can account for it in its balance sheet. In case, a cut-off date is not announced, RBI has the option of gradually adjusting its balance sheet without any significant market impact,” it said.

There is uncertainty regarding the legalities and procedures that will be applicable in this case, especially if the magnitude of unaccounted currency is large. But the gains to the government will be gradual and staggered keeping in view the market implications, Kotak Securities said. It is unclear whether any legislative change is required to allow RBI to book gains from a liability, which is ‘undeclared’ and for which assets have already been created.

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